CORPORATE CULTURE AND THE ROLE OF BOARDS REPORT OF OBSERVATIONS

July 2016 #culturecoalition Coalition partners

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The FRC is responsible for promoting high quality corporate governance and reporting to foster investment. We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work. We represent UK interests in international standard-setting. We also monitor and take action to promote the quality of corporate reporting and auditing. We operate independent disciplinary arrangements for accountants and actuaries, and oversee the regulatory activities of the accountancy and actuarial professional bodies.

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Culture report: Corporate Culture and the Role of Boards 1 FOREWORD

The way companies create and sustain value is directly linked to the debate about the role of business in society.

A healthy culture both protects and generates value. It is therefore important to have a continuous focus on culture, rather A healthy culture both than wait for a crisis. Poor behaviour can protects and generates be exacerbated when companies come value. It is therefore under pressure. A strong culture will endure important to have in times of stress and mitigate the impact. a continuous focus This is essential in dealing effectively with on culture, rather than risk and maintaining resilient performance. wait for a crisis. Strong governance underpins a healthy culture, and boards should demonstrate good practice in the boardroom and Sir Winfried Bischoff promote good governance throughout the Chairman business. The company as a whole must Financial Reporting Council demonstrate openness and accountability, and should engage constructively with shareholders and wider stakeholders There needs to be a concerted effort about culture. to improve trust in the motivations and integrity of business. Rules and sanctions In taking action on culture, I should like clearly have their place, but will not on their all those involved to consider three own deliver productive behaviours over important issues: the long-term. This report looks at the increasing importance which corporate Connect purpose and strategy to culture. culture plays in delivering long-term Establishing a company’s overall purpose business and economic success. is crucial in supporting the values and driving the correct behaviours. The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. Boards should oversee both.

2 Financial Reporting Council The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. Boards should oversee both.

Align values and incentives. Recruitment, I also ask investors and other stakeholders to performance management and reward engage constructively to build respect and should support and encourage behaviours trust, and work with companies to achieve Investors should consistent with the company’s purpose, long-term value. Investors should consider consider carefully values, strategy and business model. carefully how their behaviour can affect how their behaviour Financial and non-financial incentives company behaviour and understand how can affect company should be appropriately balanced and their motivations drive company incentives. behaviour and linked to behavioural objectives. In its research for this project the FRC has understand how their Assess and measure. Boards should give seen abundant evidence that companies motivations drive careful thought to how culture is assessed and boards are taking action to shape their company incentives. and reported on. A wide range of potential culture in order to encourage investment. indicators are available. Companies This will drive efficient capital allocation, can choose and monitor those that are improve productivity and deliver sustainable appropriate to the business and the value. We commend these companies and outcomes they seek. Objectively assessing encourage them to maintain this focus. We culture involves interpreting information encourage those companies yet to take sensitively to gain practical insight. action, to consider the benefits of addressing this important issue.

Sir Winfried Bischoff Chairman July 2016

Culture report: Corporate Culture and the Role of Boards 3 INTRODUCTION

The FRC’s mission is to promote high quality corporate governance and reporting to foster investment. The UK has a good reputation in this field which has underpinned a substantial amount of business success, but it is by no means perfect.

There are valid questions about how The view of the FRC is that the UK effectively existing corporate governance governance model remains an efficient arrangements address the board’s and effective means of meeting the responsibilities to stakeholders other objectives of, and arbitrating between, than shareholders, as envisaged in the the many stakeholders in the market. Companies Act 2006. The framework The combination of legislation, regulation of corporate governance in the UK is based and codes provides a flexible framework on a shareholder primacy and value model for companies and their stakeholders of equity capitalism. There is a continuing to pursue their objectives and achieve debate about what this means. One view long‑term success. Success depends, is that it necessarily involves a short-term however, on the spirit with which focus since shareholders are most companies and investors apply the interested in the certainty of more principles and use the flexibility they have. immediate financial returns. This inevitably has consequences in terms of the The FRC embarked on this project to gain decisions and actions which companies a better understanding of how boards are and investors take. Short-termism can drive currently addressing culture, to encourage poor business behaviours and conduct, discussion and debate, and to identify and for example: inappropriate incentives, share good practice to help companies. market-rigging, poor customer service, This report seeks to address how boards low levels of investment and opaque and executive management can steer financial structures and arrangements. corporate behaviour to create a culture that will deliver sustainable good performance. This report looks at the increasing importance which corporate culture plays in delivering long-term business and economic success – an issue very much to the fore this year. In doing so it focuses on the role of the board in shaping, monitoring and overseeing culture.

4 Financial Reporting Council The view of the FRC is that the UK governance model remains an efficient and effective means of meeting the objectives of, and arbitrating between, the many stakeholders in the market.

With the help of our partners in the project, The FRC is very grateful to all those who the Chartered Institute of Management responded to our invitation to participate, Meetings Accountants (CIMA), the City Values and would particularly like to thank our Forum, the Chartered Institute of Personnel partners for their contribution and guidance and Development (CIPD), the Institute of throughout the project. We would also like Business Ethics (IBE) and the Chartered to thank Independent Audit Limited for 300 Institute of Internal Auditors (IIA), we their invaluable work in surveying and focused on broad aspects of company interviewing chairmen, chief executives culture – the role of the board in delivering and company secretaries. Interviews sustainable success, engagement with employees, customers, shareholders and The report is designed to stimulate thinking other stakeholders, how to embed the around the role of boards in relation to desired culture, and how to assess culture. culture, and encourage boards to reflect 23 Our partners have published separate on what they are currently doing. Over the reports on each of these aspects, listed next year we will be monitoring reporting FTSE chief executives in Appendix 2. on culture by companies and investors. We welcome feedback on this report, This report was informed by an extensive which will inform our review of the literature review, the submissions from our Guidance on Board Effectiveness in 2017. 58 partners in the coalition, interviews with Please email: [email protected] to FTSE chairmen FTSE chairmen and chief executives, get in touch. surveys of heads of internal audit, chairmen and company secretaries, and many roundtables and discussions with investors, Surveys a range of professionals working in companies, and organisations with expertise and experience in company culture. 44 FTSE chairmen

Culture report: Corporate Culture and the Role of Boards 5 EXECUTIVE SUMMARY

Culture in a corporate context can be defined as a combination of the values, DEMONSTRATE attitudes and behaviours manifested by a company in its operations and relations LEADERSHIP with its stakeholders. These stakeholders Leaders, in particular the chief executive, include shareholders, employees, must embody the desired culture, embedding customers, suppliers and the wider this at all levels and in every aspect of the community and environment which are business. Boards have a responsibility to act where leaders do not deliver. affected by a company’s conduct.

Key observations

From our discussions with chairmen, chief executives, investors and a broad range of stakeholders and professional organisations we make the following observations about corporate culture:

RECOGNISE THE VALUE BE OPEN AND OF CULTURE ACCOUNTABLE A healthy corporate culture is a valuable Openness and accountability matter at every asset, a source of competitive advantage level. Good governance means a focus on and vital to the creation and protection of how this takes place throughout the company long-term value. It is the board’s role to and those who act on its behalf. It should determine the purpose of the company and be demonstrated in the way the company ensure that the company’s values, strategy conducts business and engages with and and business model are aligned to it. reports to stakeholders. This involves respecting Directors should not wait for a crisis before a wide range of stakeholder interests. they focus on company culture.

6 Financial Reporting Council EMBED AND INTEGRATE ASSESS, MEASURE The values of the company need to inform AND ENGAGE the behaviours which are expected of all Indicators and measures used should be employees and suppliers. Human resources, aligned to desired outcomes and material to internal audit, ethics, compliance, and risk the business. The board has a responsibility functions should be empowered and to understand behaviour throughout the resourced to embed values and assess company and to challenge where they find culture effectively. Their voice in the misalignment with values or need better boardroom should be strengthened. information. Boards should devote sufficient resource to evaluating culture and consider how they report on it.

ALIGN VALUES EXERCISE STEWARDSHIP AND INCENTIVES Effective stewardship should include engagement about culture and encourage The performance management better reporting. Investors should challenge and reward system should support themselves about the behaviours they are and encourage behaviours consistent encouraging in companies and to reflect with the company’s purpose, values, on their own culture. strategy and business model. The board is responsible for explaining this alignment clearly to shareholders, employees and other stakeholders.

Culture report: Corporate Culture and the Role of Boards 7 Executive summary

The Companies Act 2006 makes it clear Business, society and the that in pursuit of the overarching duty to corporate governance promote the success of the company for framework the benefit of the members as a whole, directors should take account of a range Companies do not exist in isolation. of stakeholders in making decisions. They need to build and maintain successful Inevitable conflicts will arise between the relationships with a wide range of interests of different sets of stakeholders stakeholders in order to prosper. These but where there is a broad alignment relationships will be successful and between their objectives, a focus on enduring if they are based on respect, how business is conducted and how trust and mutual benefit. stakeholders are treated will create opportunities for value creation that Business’ reputation is still recovering have mutually reinforcing benefits for all. from the impact of the global financial crisis and continuing examples of poor corporate behaviour. As we have seen, cultural failures damage reputation and UK Companies Act 2006, have a substantial impact on shareholder Section 172. value. Intangible assets such as intellectual (1) A director of a company must act in property, customer base and brand now the way he considers, in good faith, account for over 80 per cent of total would be most likely to promote the corporate value, compared to under success of the company for the 20 per cent 40 years ago.1 This shift benefit of its members as a whole, magnifies the impact on total value when and in doing so have regard a reputational crisis occurs. This is a (amongst other matters) to – challenge for boards, which must find ways to understand and influence the factors (a) the likely consequences of any which affect culture and behaviours. decision in the long-term,

The debate about the role of business in (b) the interests of the company’s society is directly linked to the way in which employees, companies create and sustain long-term value for the benefit of a wide range of (c) the need to foster the company’s stakeholders. From the outset of our work business relationships with suppliers, the FRC has been clear that we wish to customers and others, offer constructive observations which (d) the impact of the company’s have practical application. We are not operations on the community and suggesting changes to the current flexible the environment, framework of corporate governance. While legislation, regulation and codes influence (e) the desirability of the company individual and corporate behaviour, they maintaining a reputation for high do not ultimately control it. standards of business conduct, and

(f) the need to act fairly as between members of the company.

1 Ocean Tomo LLC, 2015. Intangible asset market value study. S&P500 http://www.oceantomo. com/2015/03/04/2015-intangible- asset-market-value-study/

8 Financial Reporting Council The UK Corporate Governance Code (the Code) ascribes to boards a Purpose, strategy and The focus on long-term responsibility for setting the company’s the business model performance is critical values and standards (supporting principle and reduces the risks of A.1), while the preface to the Code states: Several chairmen told us that a clear purpose – why the company exists and short‑term, inappropriate what it is there to do – is the starting point behaviour. Poor ‘One of the key roles for the board for a successful company and closely tied short‑term behaviour includes establishing the culture, to culture. In an increasingly complex and performance gets values and ethics of the company. It is business environment, boards and found out in the important that the board sets the correct executive teams need to have a good longer‑term. “tone from the top”. The directors should understanding of the company and how Sir Martin Sorrell, lead by example and ensure that good it makes money – its business model – in Chief Executive standards of behaviour permeate order to have a clear line of sight between WPP throughout all levels of the organisation. the decisions they take and how these This will help prevent misconduct, impact on the company’s culture and unethical practices and support the deliver its purpose. delivery of long-term success.’2 Companies are recognising the value in We need to make sure Culture is closely linked to risk and risk defining and communicating a broader that we are clear-sighted appetite and the Code asks boards to purpose beyond profit which generates enough about our culture, look at the risks which might affect the wealth and delivers benefits to society as and that it is sufficiently company and its long-term viability. a whole. This can help create shared goals, motivate employees and build trust with adaptive to a changing Chairmen and chief executives recognise customers. As organisations become less world and changing the relevance of major shifts in the broader hierarchical, and flexible working more interpretations. environment in which business operates. prevalent, many companies are finding that Sarah Bates Acceptable behaviour evolves over time common purpose is helping to bind Chairman so culture has to be adjusted for the organisations together. context and the times in which the St James’s Place company is operating. For example, Chairmen felt strongly that there is consumers are far more concerned with no ‘one-size-fits-all’ when it comes to the environmental impact of companies culture. What matters is that the culture and of their own behaviour than they were is appropriate for the context in which Culture is most definitely 30 years ago. Well-chosen values typically the company is operating and that there factored into discussions stand the test of time, but need to be is internal alignment between company on the strategy. tested for continuing relevance as society purpose, values, strategy and business changes and business adapts. model(s). Aligning business decisions with Derek Mapp purpose and values and focusing on how Chairman financial targets will be achieved, will over Informa the long-term lead to more sustainable value creation. One example of a framework that can help boards to achieve alignment has been developed by the City Values Forum.3

FTSE chairmen and chief executives 2 FRC, 2016. UK Corporate interviewed strongly agreed that culture is Governance Code https://www. integral to everything they do and features frc.org.uk/Our-Work/Publications/ Corporate-Governance/UK- implicitly or explicitly in discussions about Corporate-Governance-Code- strategy, and in particular how to achieve April-2016.pdf that strategy. 3 City Values Forum and Tomorrow’s Company, 2016. Governing culture: risk and opportunity – a guide to board leadership in purpose values and culture

Culture report: Corporate Culture and the Role of Boards 9 Executive summary

Chairmen also report that culture impacts Investors echoed much of this sentiment, the strategy that is chosen, for example: pointing out that they gain a good deal Culture is a crucial issue of insight into the culture of a company which is inseparable and –– Which international markets should through its articulation of its business inextricable from strategy. the company operate in? model and the attitude to employees. It is critical to execution of –– Can the desired culture be maintained For most large organisations, the business strategy – and is all about in particular markets? model comprises a complex and how we are going to go –– How quickly should the company connected series of relationships, activities, about this. expand? processes and stakeholders, drawing on António Horta-Osório a range of inputs and resources to achieve –– Will rapid growth affect the culture Chief Executive the stated purpose. For boards to have the in a harmful way? Lloyds Banking Group capability to assess whether its culture is For most chairmen, culture is the enabler, aligned with its purpose, a business model the differentiator and a source of competitive framework can be used to support board advantage. The importance of culture to the discussion and to assist in understanding successful operation of the firm is amplified this complexity. One example of such a still further when the capital of the firm is framework has been developed by the vested primarily in the quality of its people. Chartered Institute of Management Accountants (CIMA).4 Chief executives we interviewed told us that culture is an intrinsic part of how At a strategic level, the board’s focus will be the business is managed and an output on setting and monitoring the company’s of how the business is run. Key enablers culture, in terms of the values and for achieving strategic targets include the behaviours which best deliver value creation business model(s), employee behaviour, over the short, medium and long-terms processes and management. Many chief and the incentives which support this. executives agreed that, in normal At an operational level the focus will be on circumstances, what works best for many obtaining assurance that the company’s companies is making sure behavioural operations are aligned with its culture. In this considerations are a prominent, consistent way, boards and executive management part of everything they do. can ensure that decisions around value creation and values are fully integrated.

Our culture is at the heart of the company and is recognised as our differentiator. It is our most cherished asset and one on which the board is heavily focussed to ensure it does not change as the business grows 4 CIMA, 2016. Financial Management and becomes more complex. – Rethinking the business model http://www.cimaglobal.com/ Alastair Lyons, Chairman, Admiral Thought-leadership/Research- topics/Budgeting-and-planning/ Rethinking-the-business-model/

10 Financial Reporting Council It can be difficult for non-executive directors View from the boardroom (NEDs) to obtain sufficient knowledge People on the board must of business operations to challenge Chairmen and chief executives agreed never accept something management effectively. It is important overwhelmingly that boards must have a that they don’t understand. for the chairman to set the tone in the responsibility for culture and must exercise This applies to established boardroom so that NEDs are empowered oversight in this area. The board can members as much as new to raise concerns where they have doubts. influence culture in many ways. The board members. If something is is responsible for appointing and removing The key challenge for boards is to not clear, the board must the chief executive. Cultural change may understand what in practice drives the ask the question even if it take a long time to bed in; and boards can behaviour of employees and management seems a stupid one. They provide continuity. Boards also find it easier and to shape and influence those drivers must have the confidence to be objective since they are not immersed in a way that will foster greater sustainability to admit that they don’t in the day to day running of the business. and improved performance over time. understand.

Strong governance is essential for a healthy The inherent difficulty in understanding and Anthony Habgood culture. As well as the processes and measuring intangibles such as behaviour Chairman practices in the boardroom, governance and culture, means that boards need to RELX Group needs to focus on the substance of start by defining their purpose and values what boards do, who they engage with, and setting out clearly the desired culture what information they are given and what and behaviours, against which they can questions they ask. Boards should see that benchmark actual behaviour throughout good governance runs through all areas the organisation. They then need to of the business, including the executive develop frameworks and tools to assess committee and the layers of middle behaviours and culture to guide management. This will deliver improved management and board decisions. decision-making and better outcomes.

Shareholders rely on the board to oversee a healthy culture that is compatible with the business model, steers the executive and delivers the strategy. Boards must be actively engaged in the business of shaping, overseeing and monitoring culture and holding the executive to account where they find misalignment with company purpose and values.

Culture report: Corporate Culture and the Role of Boards 11 HOW CAN THE BOARD INFLUENCE AND SHAPE CULTURE?

A recurring theme in our discussions was the importance of trust and openness as enablers of positive and productive behaviours.

Culture is much more about people than Throughout our engagement, NEDs were it is about rules. Codes of conduct are comfortable with the board’s responsibility It’s a challenge to influence a baseline; a culture is created by what you for setting the values of an organisation. the culture – it takes a lot do rather than what you say. The alignment However many were much less comfortable of time and effort to and consistency of behaviours of leaders, about their role or ability to embed the change it. and how they communicate through words values in the organisation, and some felt this and actions is the essential starting point.5 is not the role of the non-executives. John Allan Chairman Large organisations, particularly those with Tesco global reach, will have sub-cultures which can reflect different geographies, business units and remits. Nevertheless it is realistic to aspire to a common set of expected behaviours based on company purpose The Board sets the and values. values and culture (how people treat each other, how they operate within the supply chain and how they work with employees) and management is then responsible for It is vital to have a genuinely independent implementing this. chairman who can bring unique perspectives John Watson and expertise to their leadership of the board. Chairman They should be properly remunerated for Bellway this role under governance rules. 5 CIPD, 2016. A duty to care? Richard Solomons, Chief Executive, IHG Evidence of the importance of organisational culture to effective governance and leadership https://www.cipd.co.uk/

12 Financial Reporting Council What counts is the actual behaviour of the organisation and its top people. This is far more significant than a hundred statements about a company’s culture or its ethical policy. David Tyler, Chairman, J Sainsbury

Yet, when we surveyed chairmen on how influential different individuals were on Role modelling and behaviour Leading by example is company culture in practice, 89 per cent of the board about ensuring boardroom felt the role of the chairman is influential behaviour is exemplary or very influential and 54 per cent viewed For boards, culture starts with their 8 and in line with the values, the role of NEDs as influential or very behaviour in the boardroom. Employees ethics and integrity. influential.6 The views of company need to see that the leadership is held 7 to account and to the same standards as secretaries were in line with this. Roberto Quarta the rest of the organisation. ‘Leading by Chairman Even though not directly responsible for example’ was one of the themes most often Smith & Nephew embedding culture, boards nevertheless emphasised by chairmen when speaking and WPP play an important role in influencing about the board’s influence on culture. culture and in supporting the efforts of For example showing respect to senior the executive to embed the values and managers who present to the board.9 reinforce desired behaviours and culture. Several chairmen spoke of managers Two of the most important ways in evaluating the board’s behaviour and many which boards can influence culture are emphasised behaviour as important. When in leading by example – displaying and chairmen were asked how much attention 6 Independent Audit Limited, 2016. communicating the values when in the they give to setting the tone through leading Survey of 44 chairmen of FTSE 100 business – and the selection and by example, 58 per cent said ‘we do and 250 for FRC management of the chief executive. enough for now’ and 36 per cent answered 7 Independent Audit Limited, 2016. ‘some – but we could do more’.10 Survey of 33 company secretaries of FTSE 100 and 250 for FRC 8 Independent Audit Limited, 2016. Cultivating Culture: What boards can and can’t do about behaviour http://independentaudit.com/ publications/cultivating-culture- boards-can-cant-behaviour/ 9 Independent Audit Limited, 2016. Interviews with 58 chairmen of FTSE 100 and 250 for FRC 10 Independent Audit Limited, 2016. Survey of 44 chairmen of FTSE 100 and 250 for FRC

Culture report: Corporate Culture and the Role of Boards 13 How can the board influence and shape culture?

Chairmen, chief executives and company Chief executives secretaries all told us that the most It is very difficult for the powerful way in which the board A view that came through consistently board to drive culture down influences culture, other than through in our engagement was that the chief the organisation. However, its own behaviour, is through its selection executive has the most influence over the they can influence senior and management of the chief executive. culture of the business. This is even more management. The nominations committee should marked in smaller companies.11 support the board by building culture Philip Aiken If accountability for owning, assessing in to recruitment considerations. Chairman and overseeing culture lies with the board, AVEVA In A duty to care?, CIPD supports this view: then accountability for driving culture lies “…for many boards the single greatest primarily with the executive management influence they have on the culture of the team, starting with the chief executive. It is organisation is the appointment, the chief executive that sets expectations remuneration and firing of the CEO – and drives behaviour and change if they get the decision wrong there may throughout the organisation. be severe repercussions felt across the culture of the business.”12 “The tone has to come from the CEO – he is responsible for the delivery Several chairmen expressed the view that globally of a culture that values high appointing the chief executive is one of the standards of conduct. It’s about personal most important tasks of the board, while leadership and being very visible. There removing a chief executive who does not fit is no substitute for speaking to people is one of the most difficult, particularly if 13 face-to-face. Good stories, employee current company performance is good. experiences are also important.” Company secretaries surveyed reported that 73 per cent of boards consider the Stuart Gulliver, Chief Executive, HSBC cultural and behavioural fit of an individual during recruitment. “There is board culture and organisational culture. The two are linked but it is the Chief executives we interviewed agreed CEO who most influences organisational unanimously that driving culture was a culture. The key is to balance the focus key part of their role and the board should of the board so as to encourage the hold them to account for doing that. right behaviours across the organisation They believe that NEDs have an important without trying to do the job of the CEO.” role in helping executives anticipate Ian Durant, Chairman, Greggs unintended consequences, including behavioural ones, of management proposals.

Driving culture is a key part of my job. ‘Driving’ is the right word, the world is changing 11 Roundtable with executives and too fast just to speak about maintaining. I expect non-executive members of the Quoted Companies Alliance – the board to hold my feet to the fire over it. April 2016 12 CIPD, 2016. A duty to care? Rob Noel, Chief Executive, Land Securities Evidence of the importance of organisational culture to effective governance and leadership 13 Independent Audit Limited, 2016. Survey of 44 chairmen of FTSE 100 and 250 for FRC

14 Financial Reporting Council Chief executives need to be visible and Planning the succession of the chief communicate constantly with the executive well in advance, and having As CEO, everything you say organisation through meetings, events, an open discussion about the values and is amplified manifold and messages, webcasts and video. Several attitudes required in a new chief executive the ‘say/do’ ratio is what chief executives emphasised the is important. Most chairmen stated that really matters. importance of being approachable and cultural fit was a major factor in senior accessible to customers and employees. executive selection. Internal promotion is Javed Ahmed Making it easy to communicate directly perceived as considerably less risky, given Chief Executive also provides good insight. the individual is much better known, and Tate & Lyle will have demonstrated adherence to the Communications from the chief executive company’s values. can have a significant effect on behaviour. Consistent, regular and open communication of simple messages are “If the culture is working and the company is a financial success, there is It is essential to avoid key to building trust and encouraging the dilution of the message, to desired behaviours. A number of chief much less risk in selecting an internal candidate. If something is wrong and maintain simplicity and use executives found sharing stories of good simple language. and bad culture (from the business) was you want to make big changes, it is effective in demonstrating expected better to get an external candidate who António Horta-Osório behaviour. will bring in new values as CEO.” Chief Executive Gareth Davis, Chairman, Wolseley Lloyds Banking Group If the board is seeking a change in culture, it must clearly understand and articulate The board has a role in assessing the the values and behaviours it wishes to performance of executives. The chairman/ promote in order to guide its choice of chief executive relationship is seen as vital chief executive. Several chairmen stressed by both chairmen and chief executives – the importance of including values and it should be collaborative, constructive War stories are a useful way expected behaviour in a new chief and open. Basing this relationship on trust to get the culture solidified. executive’s job profile, alongside skills, rather than competition allows the chairman Jeremy Darroch experience and track-record. to act as their sounding-board.14 Chief Executive Sky

The board can do nothing without the CEO who has to lead. The board has to influence through him which is why CEO selection is the most important thing a board has to do. Ian Durant, Chairman, Greggs

14 Independent Audit Limited, 2016. Survey of 33 company secretaries of FTSE 100 and 250 for FRC

Culture report: Corporate Culture and the Role of Boards 15 How can the board influence and shape culture?

“The relationship between the chairman and CEO is important in defining cultural Culture on the agenda The chairman is a very behaviour and policies across the Boards, on the whole, are spending more important ambassadorial business. The more closely they work time discussing values, behaviours and figure. He travels and together, the more likely it is that a culture than they were five years ago.15 represents. There needs strong ethical culture will evolve across Some boards are addressing the topic as to be a close chairman/ the business.” a standalone agenda item, while others CEO relationship. Alan Thomson, Chairman, Bodycote report actively discussing and addressing values, behaviour and culture in a more George Weston One of the most important tasks for boards integrated way, for example as part of Chief Executive is to hold the chief executive and senior discussions on customer and employee Associated British Foods executives to account. Where boards feedback, remuneration and reward become aware that the chief executive policies or health and safety incident (or another member of the executive reports. Most boards agreed that they committee) is not demonstrating the could be seeking more assurance on The Board needs to show desired behaviours, they should take action. culture. There was also considerable it has zero risk appetite for agreement that audit, nominations, If the individual is not receptive to the poor ethical behaviour. remuneration and risk committees could board’s efforts, it may mean the board must This sends a clear signal. do more to support the board in exercise its power to dismiss them. While Turning a blind eye to addressing culture. this can be unsettling for investors and dubious behaviour is employees, several chairmen spoke of very dangerous. having to change the chief executive to gain “The chairman’s responsibility for culture control of the culture and the positive impact has moved to the top of my agenda as Sir Peter Gershon bringing in a new chief executive can have. a result of my responsibilities under the Chairman Senior Managers’ Regime. Now I receive National Grid a lot of information on culture, a year “Dominant personalities can be disruptive ago none.” in all sorts of ways especially culture. Choosing the correct balance of people Mark Nicholls, Chairman, is key to culture.” Rathbone Brothers John Watson, Chairman, Bellway

15 Financial Times & Institute of Chartered Secretaries and Administrators, 2016. Boardroom Bellwether – Insights into what boards are thinking from the survey of FTSE 350 company secretaries https://www.icsa.org. uk/knowledge/research/ft-icsa- boardroom-bellwether-survey- summer-2016

16 Financial Reporting Council Our business model Culture is not a separate item but requires us to focus on the there are elements of it in all other discussions, needs of customers and employees. The board decisions and actions – customer service, conversation is not framed measuring and managing people, or informed by an aggregated set of cultural or how we are dealing with suppliers and values-based indicators and agents – and they all come together. there are few formal reports, but the board spends Philip Rogerson, Chairman, Bunzl a great deal of time looking at culture and values, driven by specific issues or by regular feedback, surveys and information from the frontline. The figure below illustrates how often some The challenge for boards is how to FTSE companies discuss culture as a full coordinate across the organisation and Patrick Lewis board agenda item: build a holistic approach to addressing Group Finance Director 17 culture. One large UK bank has recently John Lewis tasked a number of its business divisions How frequently is ethics and to work together to provide a single report culture a full board agenda item? of cultural indicators to the board. The (Number/percentage of respondents)16 individual functions each track many different data points in relation to behaviour 6% and culture across the bank. Discussion 17% at the board is focussed on a small number 1 of the most meaningful measures that 3 provide crucial insight and can be tracked over time. The chairman is confident this 11% is a significant step in helping the board 2 6 33% perform its role in seeking assurance on culture. 1 6% Those boards reporting that values, behaviours and culture were rarely 5 discussed, explained that company culture is intrinsic and expected behaviours are 28% understood by all and do not need to be articulated. This may be a result of a long established culture, a sense of Once a quarter complacency or a reluctance to address Every six months the subject because it is perceived as difficult to pin down. Once a year Less than once a year Never 16 Institute of Business Ethics, 2016. Other Culture by committee – the pros and cons Base: Of the 24 survey participants, 17 Roundtable with heads of internal 18 responded to this question audit, human resources, finance, and risk and compliance – January 2016

Culture report: Corporate Culture and the Role of Boards 17 How can the board influence and shape culture?

Like risk, culture doesn’t benefit from being given its own separate status and processes. It is part of doing good business and needs to be intrinsic in everything. Sir Peter Gershon, Chairman, National Grid

The head of investor relations of a private Cultural due diligence in equity firm who had experienced a merger mergers and acquisitions with a European business reflected on his experience. Participants highlighted how important it is to consider cultural fit and alignment of values during a prospective merger “Both companies were in the same or acquisition. Many chairmen and chief business and had a similar history. executives said they had not pursued a On paper they were the perfect match merger because of a lack of cultural fit or for each other but no one asked about because they had concerns about the cultural fit and in the end it did not work. values and behaviours in the other We were still talking about ‘us and them’ company. Private equity houses also said two years later, we haven’t had the it was common for them to walk away from results we expected when the two a deal because of an overly dominant businesses came together and now managing director or chief executive that we’re looking at a reverse takeover.” they did not feel they could work with.18 Chief executives we interviewed reported In contrast, our survey of company it was important to address culture in a secretaries revealed that while 40 per cent merger or acquisition proactively without felt the board had sufficiently discussed seeking to impose it. Consistent and cultural due diligence ahead of a merger or clear messages on values and behaviours joint venture, almost 30 per cent disagreed. can help generate understanding and When doing M&A, there are two major concerns: commitment to the culture of the acquiring company. financial control and culture. On the culture side, it is either rushed through too quickly or the target never culturally integrates. It is important to take time to understand how to embed and cross- 18 Roundtable discussion with fertilise culture – not super-impose it. members of the British Venture Capital Association – May 2016 Jeremy Darroch, Chief Executive, Sky

18 Financial Reporting Council Questions for boards

Values and behaviours Has the company made a public commitment to the values? How are we demonstrating the board’s behaviour reflects the behaviour we What behaviours are being driven when expect throughout the company? setting strategy and financial targets? Are we leading by example? What percentage of board time is spent Are we clear about the values and on financial performance management behaviours we expect when recruiting against targets? And on behavioural new executives? performance management? Is the balance right? Do we hold the chief executive to account where we see misalignment? Is company tax policy consistent with stated values? Are we discussing culture in sufficient depth at board meetings? How are we challenging 'group think' and testing key decisions for The head of investor relations of a private How are we taking account of culture cultural alignment? equity firm who had experienced a merger in our board effectiveness reviews? with a European business reflected on Are we seeing evidence of sub-cultures his experience. How can we ensure we consider the or pockets of autonomy in the business impact on culture in all the decisions that could undermine the overall culture? “Both companies were in the same we take? business and had a similar history. Mergers and acquisitions On paper they were the perfect match Do the committees support the board for each other but no one asked about on culture? How confident are we that we can cultural fit and in the end it did not work. achieve a cultural fit within a reasonable We were still talking about ‘us and them’ Is there a need for a specific conduct, timeframe and what could be the cost to two years later, we haven’t had the ethics or culture committee? the business of a cultural misalignment? results we expected when the two businesses came together and now What is the company telling the outside What is our strategy for addressing we’re looking at a reverse takeover.” world about what it stands for and how it culture if we proceed? conducts business? Chief executives we interviewed reported it was important to address culture in a merger or acquisition proactively without seeking to impose it. Consistent and clear messages on values and behaviours can help generate understanding and When doing M&A, there are two major concerns: commitment to the culture of the acquiring company. financial control and culture. On the culture side, it is either rushed through too quickly or the target never culturally integrates. It is important to take time to understand how to embed and cross- fertilise culture – not super-impose it. Jeremy Darroch, Chief Executive, Sky

Culture report: Corporate Culture and the Role of Boards 19 BRINGING THE VALUES TO LIFE

If values are to be more than just words on a poster they need to be translated into a set of expected behaviours that are meaningful to the company and those who work there.

Built to Last – successful habits of visionary Blueprint for Better Business encourages companies highlighted that strategies companies to first establish their purpose. Most companies find it and practices change, but values do not.19 Companies including Unilever, Old Mutual difficult to define culture While a few of the companies we spoke and Vodafone actively support this in a way that makes it with had recently updated their values, approach to ‘uniting corporate purpose actionable. It is important most have had the same set of values and personal values to serve society’ to make it concrete in terms for many decades. Integrity, respect and which starts with having a purpose of the behaviours that are innovation are the three most commonly which delivers long-term value.21 expected and then consider expressed values of the FTSE 100. how every element of the organisation sends The values most valued by FTSE 100 companies20 messages about what the behaviour norms should be.

ntert Lord Blackwell Chairman Respet Lloyds Banking Group nnoaton afet ransparen ellene

Core alues Core eaor 19 Collins, J. and Porras, J.I., 2011. Responslt Built to Last – successful habits of visionary companies. London: Random House Business rust 20 Maitland, 2015. The values most onest valued by UK plc. http://www. maitland.co.uk/news/business/the- values-most-valued-by-uk-plc 21 Blueprint for Better Business http:// uer of tes alue epressed www.blueprintforbusiness.org/

20 Financial Reporting Council The G30 report on banking conduct and culture said that focusing on values and Engaging middle management I do not believe you can conduct are the building blocks of culture Management at every level must assume just command and control and the ‘what to aspire to’ is largely in place responsibility for owning and maintaining anymore. Business now in banks, through the bold statements the culture. Middle managers may be best is just not like that – that they have made about their intended able to observe the culture in a business especially with so many future behaviour. The report pointed out, and should be involved in communicating outposts and the ‘instancy’ however, that failing in implementation and change and developing ideas to ensure in this internet age. You embedding these values remains a serious success. Middle managers are often cited have to work by having and issue for the banks.22 as not being receptive to change, yet this sharing very deep-seated Simply adopting formal values statements may be because they are not effectively beliefs across the is not enough. In order to have an impact engaged at an early stage. Investing in organisation. It is about on behavioural outcomes and influence the training on the values and expected beliefs, not just rulebooks. way business is done, values need to be behaviours and in people management will Javed Ahmed embedded in the company and: help managers to develop and to embrace their role in embedding the desired culture. Chief Executive –– the purpose, strategy and business Tate & Lyle model of the company; –– translated into expected behaviours; –– widely and consistently communicated, including through codes of ethics/ conduct; –– reinforced through recruitment, performance management and reward processes; and –– integrated within the different functions, processes and operations in the business.

22 The Group of Thirty, 2015. Banking conduct and culture: a call for sustained and comprehensive reform. http://group30.org/ publications/detail/166

Culture report: Corporate Culture and the Role of Boards 21 Bringing the values to life

The first line of supervision, i.e. those employees responsible for managing Human resources A good culture teams on the shop floor, have a good lens Human resources (HR) has an important helps when hiring. into the true culture of the organisation. role to play in embedding the values in These individuals know whether the culture the business. Where there is a separate Jeremy Darroch is open, lines of accountability are clear and ethics and/or compliance function the Chief Executive the workforce is motivated. As immediate effectiveness is enhanced through close Sky line managers, they also have a significant collaboration with HR. Aligning HR policies impact themselves on culture and and processes with the values is a critical sub‑cultures. step in driving culture.23 CIPD’s report, A duty to care recommends: It isn’t about slogans and “The layer below middle management soundbites. It pervades is key. By looking closely at that you ‘Invest in building HR and people throughout the organisation. can really tell whether values and management strategy and capability culture have trickled down. That is which focuses on leadership and David Bellamy where you see culture played out.” management culture, and embedding Chief Executive FTSE 100 Company secretary cultural values across all levels of the St. James’s Place organisation. The board must work One chief executive we interviewed closely with the HR function to create reported that reducing the number of the appropriate organisational culture layers of management and the number through aligned strategic human of direct reports has had a positive resources management practices, effect on culture. It has increased from recruitment, induction, training accountability and ownership and initiatives, leadership development, improved communication throughout performance management resourcing the organisation. and succession.’

23 CIPD, 2016. A duty to care? Evidence of the importance of organisational culture to effective governance and leadership

22 Financial Reporting Council Recruitment, induction and training Research shows that leadership capability is also important to effective cultural Communicating the values and expected You need a strong learning change.24 As part of its ongoing role in behaviours starts early with the person and development team to overseeing and monitoring culture, the specification for prospective employees. keep the culture alive board must ensure that senior leaders Where and how you advertise and recruit because it’s vital to give of the organisation have the desire and is in itself a reflection of the values of the people the professional capability to align their leadership with the company and may influence the type of skills and the management values and to hold to account those who candidates you attract. tools to be able to do their are not willing to conform, however strong jobs in the right way. Communication of the company values their performance against financial targets. continues throughout the recruitment Dorothy Thompson Incentives, remuneration and reward process, for example in the way the Chief Executive company interacts with candidates and the Pay is a sensitive issue in the UK and Drax areas of focus and questioning at interview. affects the standing of business in society. Once appointed, the messages can be Unfortunately the continuing inconsistent reinforced through induction, ongoing alignment between executive remuneration training and performance management, and company performance and between ensuring individuals understand the the remuneration of senior executives Most companies measure company’s values, and how they are and employees has led to a lack of public individual performance translated into expected behaviours. confidence. This has taken place despite against objectives. In future increasing regulation to improve more companies will Developing leadership capability transparency and accountability. and succession planning measure individual behaviour against Building leadership capability is a central Remuneration practices are often cited a standard. concern for boards and chief executives as a driver of poor behaviour. The incentives created by performance related and there is an opportunity for more John Stewart pay, and the corresponding impact on effective collaboration between the board Chairman employee behaviours, is something that and executive. Several chief executives we Legal & General should be of utmost concern to boards interviewed said that internal talent is their (until 01.06.16) preferred method of developing leadership and remuneration committees, which could capability; the chances of a successful do more to apply a cultural and values lens appointment are greater because you to the design of remuneration policies and know the candidate well and they already individual remuneration decisions. understand the company and its culture.

People and succession come up too rarely at boards. There should be more focus on the top 100, developing the mix and spending time with the leadership group. It’s about having a pipeline of talent. You have to be clear about succession and have a strategy. 24 CIPD, 2016. A duty to care? Adam Crozier, Chief Executive, ITV Evidence of the importance of organisational culture to effective governance and leadership

Culture report: Corporate Culture and the Role of Boards 23 Bringing the values to life

Adherence to values and expected Speaking up behaviours should be an important part Recent research shows that cultivating It is easier to see signs of of how all leaders and employees are speak up and whistleblowing policies can departure from the desired assessed and rewarded. This may be lead to an increased level of trust within culture (e.g. instances of difficult because it requires greater 25 organisations. Trust is key in influencing bullying) than positive discretion in remuneration committees the culture of a business. One way to evidence of its existence. to reward or penalise behaviour, which is increase trust is through the continuous So whistleblowing is very more difficult to measure precisely than development of visible policies to encourage important. We find it profits. Investors do not generally favour transparency around possible bad practice. valuable – it isn’t dominated discretion and subjective measures; but This means developing collaborative by day-to-day complaints. they do not like the consequences of bad policies that allow people to speak up, a People know that they will culture either. well-organised set of procedures and an be protected, but they also effective system of response to concerns Salary and bonus are not the only levers for know that it comes to the that arise. driving the right behaviours in employees. board so they don’t use Powerful non-financial incentives can Also critical to success is the it lightly. be created, especially via promotion, independence of channels through which Sir Roger Carr termination policies and decisions. whistleblowing information flows. Issues Chairman that can affect this include anonymity, the BAE Systems seriousness with which management treat those who speak up and legal issues. When communication channels are developed effectively, evidence shows that speaking up becomes more engrained in the organisational culture.

Measuring the effectiveness of a whistleblowing policy can also be useful to boards in assessing how effectively a culture is embedded. A healthy ‘speak up’ culture breaks down the barriers than can often exist between the workforce and the board. External publication of the data can also give investors confidence that a genuine culture of openness exists and where it does not that the board knows about it. Demonstrating how the policy is working can also inspire employees to speak up in other ways and the culture becomes self-reinforcing.

25 ACCA (the Association of Chartered Certified Accountants), 2016. Effective speak-up arrangements for whistleblowers http://www.accaglobal.com/uk/ en/technical-activities/technical- resources-search/2016/may/ effective-speak-up-arrangements- for-whistle-blowers1.html

24 Financial Reporting Council Chief executives who pride themselves A stakeholder-based approach considers on having a healthy culture told us that an how a company’s stakeholders may open culture which supports employees perceive certain actions and some more when they speak up acts as an early recently developed codes are values- warning system and alerts management if based, such as the Bank of England’s behaviour starts to slide. It is important to Code.27 Many companies such as Vodafone treat the whistleblower fairly and with illustrate what they expect from employees, respect and to look into any concerns that with common ethical dilemmas. This are raised. It is also vital that there is a approach is particularly helpful in large, feedback mechanism to close the loop. international businesses where there may be significant cultural and geographical differences.28 Codes of ethics and conduct Regardless of the specific model it is A tool many organisations use to help clear that the existence of a code and the embed a desired culture is their code of process of developing a code help to foster ethics or conduct. A code can translate a positive culture. Its development helps generic values into more specific policies to engender a sense of trust amongst and guidance, which in turn can influence employees and stakeholders, and behaviour. Repeated behaviour over time communication and promotion by the creates a corporate culture. Codes also ethics and compliance function and senior signal to those in and outside the management can help inform critical organisation that the company sees the business decisions. Initiatives to embed value in acting with integrity. codes are often accompanied by encouraging employees to speak up where There are different ways companies can they see the code not being followed. structure their code of ethics/conduct.26 All focus on how to handle ethical The existence of a code may also allow challenges when making decisions. disciplinary procedures to be fairer and An issue-based approach gives guidance reduce the risk of wrongdoing in the on topics relevant to the company. business. Investors may use the presence, communication and frequency of review of a code of ethics/conduct as a risk indicator of the culture of a company.

The monitoring of code breaches, and particularly the reasons for those breaches and where in the business they occur, can help measure the pervasiveness of the culture that the leadership wish to embed and show whether the desired culture is truly embedded.

26 Institute of Business Ethics, 2006. Making business ethics work: The foundations of effective embedding, http://www.ibe.org. uk/userassets/pubsummaries/ embedding%20_summary.pdf 27 The Bank of England, 2015. Our Code, Our commitment to how we work http://www.bankofengland. co.uk/about/Documents/ humanresources/ourcode.pdf 28 The Vodafone Code of Conduct: Doing what’s right (2016) http:// www.vodafone.com/content/index/ about/conduct.html

Culture report: Corporate Culture and the Role of Boards 25 Bringing the values to life

One risk professional told us that risk Risk management and culture is not given enough prominence The values are an important risk culture because it is not properly understood. part of the board’s Others suggested that organisations do discussion of the risk The Institute of Risk Management defines not engage because they are reluctant appetite – the values are an risk culture as the ‘values, beliefs, to appoint risk managers who ask integral part of this – and in knowledge and understanding about risk, difficult questions, and want access turn risk appetite is part of shared by a group of people with a to sensitive information. common intended purpose, in particular the culture. the leadership and employees of an The Association for Insurers and Risk António Horta-Osório organisation.’29 Managers (Airmic) advises that risk culture Chief Executive should be thought of as a way of framing Lloyds Banking Group Globalisation, the rate of technological and risk and culture in the organisation’s overall environmental change, and regulatory culture and management system – acting requirements present increasing complexity as a bridge between risk, reward and risk and challenge for businesses. Risk taking appetite. This sentiment was echoed by is a fundamental part of growing a some of those we interviewed. successful business and companies should not seek to eliminate risk. They should be Roads to resilience looked at the way ensuring that their approach to risk taking leading organisations were building their – their risk appetite – is aligned to their ability to withstand both expected and values and an intrinsic part of their culture. unexpected risks.31 Researchers found Companies may also want to consider if that key to achieving resilience is to focus the culture they have presents any risks on behaviour and culture and achieving to the business. resilience should be at the heart of strategy and the business model of every The FRC’s Guidance on risk management, organisation. In order to achieve resilience internal control and related financial and companies should establish a culture business reporting states that the board’s based on trust and respect that also avoids responsibility for the organisation’s culture risk blindness. The result is a no blame is essential to the way in which risk culture which ensures all in the company is considered and addressed within are committed to a common purpose the organisation and with external and values. stakeholders.30

29 Institute of Risk Management (IRM), 2012. Risk culture: under the microscope Guidance for Boards 30 FRC, 2014. Guidance on risk management, internal control and related financial and business reporting, Section 1.6 31 Cranfield School of Management and Airmic, 2014. Roads to resilience – building dynamic approaches to risk to achieve future success https://www.airmic.com/ technical/library/roads-resilience- building-dynamic-approaches-risk- achieve-future-success

26 Financial Reporting Council Questions for the board to ask

Aligning HR processes and reward Risk32

How well are our values and expected Are we clear about the company’s behaviours embedded in all our HR risk appetite and is it communicated processes from recruitment to exit effectively? interviews? What risks does our current corporate How is corporate reputational risk culture create for the organisation? considered in the setting of incentives? How do we acknowledge and live Does the balance between financial and our stated corporate values when non-financial incentives support the addressing and resolving risk dilemmas? desired culture? How do we actively seek out information Are behavioural objectives included in on risk events and near misses – both leadership and employee goals and are ours and those of others – and ensure behaviours formally assessed as part of key lessons are learnt? performance review activity? How do we reward and encourage Have we considered whether top tier appropriate risk taking behaviours and executive pay awards and those of other challenge unbalanced risk behaviours employees could undermine culture? (either overly risk averse or risk seeking)?

Ethics and compliance

Is our code of ethics/conduct up to date and clearly communicated to all employees?

How do we measure that the code of ethics/conduct is adequately communicated and understood by all employees?

Is our ethics training programme up to date and have all employees completed it?

32 Institute of Risk Management, 2012. Risk culture: under the microscope guidance for boards (Adapted)

Culture report: Corporate Culture and the Role of Boards 27 BUILDING TRUST WITH STAKEHOLDERS

A 2013 global survey of executives by McKinsey & Company showed that a majority believed that issues relating to external affairs would affect their company’s income.33

Those that reported a more capable external relations team were more likely Customers The board has a duty of to take regular action and were in turn Delivery of value to the customer is vital care to those who depend more likely to see successful results. for corporate success and an essential on it (staff, suppliers, ‘The results and our experience suggest indicator of trust. Senior leaders need customers etc.) and it has that not engaging isn’t an option; neither to be familiar with customers and their to demonstrate that it fulfils is neglecting the organisational capacities expectations and make customer service that duty. and resources that support meaningful a priority for their workforce. Culture that action’ the report said. puts the customer first, with appropriate Peter Johnson Chairman McKinsey suggested that there are three training and incentives that underpins this, Electrocomponents elements to a successful approach to communicates this clearly to staff. In the external stakeholders. First, the company course of our research, we spoke with must have a clear purpose built around a many companies that have a renewed set of values that will inform the message. focus on the customer. Second, the approach needs to be strategic, Higher levels of customer satisfaction and based on a clear understanding of translate into increased sales.34 which relationships with which groups Communicating with frontline employees matter and why. Third, companies need and ensuring good morale is therefore a to decide on the nature of the approach key part of the requirement to look after – will it be open and proactive or defensive. customers. Strategic commitment to customer service and the development of long-term relations with business partners 33 McKinsey & Company, 2013. sharing the same values and ethos are External affairs at a crossroads http://www.mckinsey.com/ important ingredients of successful business-functions/strategy-and- customer focus.35 corporate-finance/our-insights/ external-affairs-at-a-crossroads 34 Institute of Customer Service Customer Satisfaction Index 2014 35 The Institute of Customer Service, 2015. Leading by example: How values-based leaders will shape the future of customer service.

28 Financial Reporting Council Our entire customer-centric The purpose of a company can’t be to maximise strategy is driven by the shareholder value. That’s a derivative of the need to embed cultural issues around service purpose not the purpose itself. The purpose has and integrity.

to be about serving customers. Sir Richard Lapthorne Anthony Habgood, Chairman, RELX Group Chairman Cable & Wireless Communications

It’s about doing things It is important that the company allows its Employee voice our way – strong beliefs customers ready access when they have a Employee voice is the two-way and values need to be built problem that needs resolving. Companies communication between employees and into the way we manage the also need to be careful in the way they 37 the organisation. Engagement activities business. Those beliefs need handle confidential personal data, as help employees to share ideas and to drive business decision- unauthorised release can severely damage concerns with senior teams to steer making and that means customer confidence. Boards need to decisions regarding the business. A culture driving customer excellence. monitor customer service indicators of engagement and ‘permission’ is required regularly and consider the implications for for employees to feel able to voice their Vittorio Colao reputation, risk management and long-term ideas and concerns. Measuring the extent Chief Executive business performance. to which employee voice processes are Vodafone enabled and used is a useful measure of culture on which boards can draw. Employees Mechanisms and channels for employee A key ingredient of a healthy culture voice range from leaders and managers is a willingness on the part of senior who listen to and actively encourage management to listen to their employees employees to speak up, to formal and and recognise that their commitment is informal internal channels of communication often long-term. Employees usually want – such as: ‘town hall’ or networking their organisation to succeed, and have meetings and use of social media; good ideas about how to make this engagement of employees at all levels in happen. It makes sense to empower them.36 projects and change initiatives – and formal structures, such as unions and employee councils, and external channels, such as whistleblowing or external social media.37

36 IBE, 2016. Stakeholder engagement – values, business culture and society. Interview with Frances O’Grady – Secretary General, the Trade Unions Congress http://www.ibe.org.uk/ 37 CIPD, 2016. A duty to care? Evidence of the importance of organisational culture to effective governance and leadership.

Culture report: Corporate Culture and the Role of Boards 29 Building trust with stakeholders

Changing workforce Suppliers The modern workplace differs markedly Most people define from those of previous generations. Many companies today have extensive themselves by their job so Business relies increasingly on trust and supply chains. A challenge for companies there has to be a match on influence as well as on production and is how to ensure that supplier culture and between how they see control. This inevitably has an impact on behaviour meet the standards that apply themselves and how the the workforce and on the culture of an within their own group. This can be difficult organisation sees itself. They organisation. What has emerged is a more because suppliers may have their own set must have the same values open workforce which delivers discrete of values and working methods and they in order to be comfortable, projects with flexibility and mobility. This may be supplying a number of different engaged and for them to get reduces costs and enhances reach. companies, each with its own set of something from their work. requirements. In other cases people The number of people who are not full-time Geoff Cooper permanent employees, but are flexible representing the company in customer facing roles may be employed by a sub- Chairman workers and contractors, continues to Card Factory grow. In these circumstances, maintaining contractor where the customer would a certain culture can be harder. The flexible assume they are a direct employee of the workforce has greater empowerment but company and expect no difference. also greater scope for deviation from A starting point for engagement with core values. The detachment of some suppliers is to treat them with respect and employees and contractors can impede the to recognise the mutual benefit of the creation of a sound culture as they may not relationship. For example, paying suppliers have bought into the values of the company promptly is fair and builds trust and goodwill. and have less to lose when things go wrong. Clearly, while difficult to address, these risks need to be managed.

New ways of working – managing the open workforce suggests that successful companies should seek to monitor and In extreme cases, supplier companies that manage their talent through understanding are not clear about what is expected of the risks and developing new tools to them or the law, may cause more serious enhance performance and decision compliance issues for companies. There 38 making. The research argues that having is also a reputational risk from not selecting a strategy in place to recognise these companies that understand the client challenges can significantly improve the company’s values and represent them. impact and create a culture beyond Procurement policy therefore has to be traditional organisational boundaries. It is consistent with company values. clear that the change in ways of working Companies need to be clear that should not present a barrier for focusing preference will be given to suppliers that on cultural change. meet the expected standards. In some cases this may involve helping suppliers to develop and train their own workforce in the expected standards of behaviour.

38 CIMA, Chartered Global Management Accountant, 2014. New ways of working – managing the open workforce http://www. cgma.org/resources/reports/ pages/new-ways-of-working.aspx

30 Financial Reporting Council As these figures demonstrate, an increasing Regulators proportion of enterprise value is now made The right corporate culture up of intangibles that are not capitalised Relations between a company and its is critically important for the such as brand, reputation, intellectual regulators are not always easy given that delivery of sustainable, property, human capital and culture. These their interests are not fully aligned. A long-term performance, and factors are inherently difficult to measure in company’s attitude to regulators can often hence sustainable pensions the traditional sense. However, they are be a useful indicator of culture; is the for our members. closely associated with risk and opportunity relationship driven by narrow self-interest and are of significant interest to shareholders and a desire to disclose as little as possible Chris Hitchen who need to be able to hold boards to or does it approach the relationship in a Chief Executive account for assessing and monitoring these constructive and open manner and regard Railpen Investments intangible assets. it as a source of support and mutual benefit. A focus on how the executive Shareholders have an important role to play engages with the regulator is one way in engaging with companies on culture.41 in which boards can understand the While they cannot directly intervene, they prevailing culture and seek to influence it. can help to bring about change through Regulators too need to be aware that the high quality dialogue. They can also requirements they make of companies may support companies that want to innovate have unintended behavioural and change culture, for example through consequences. changes to methods of incentivisation.

Shareholders, chairs and chief executives Shareholders all report a degree of frustration in establishing a dialogue about culture. Shareholders have a unique relationship Some companies believe that most with companies, as providers of capital and shareholders are primarily interested in the because of their ownership rights. short term outlook and unwilling to spend Shareholders elect the board and directors time discussing how embedding a strong are formally accountable to them. Boards, culture contributes to long-term success. particularly chairs and board committee Excessive focus by shareholders on chairs, are therefore often directly involved short-term performance – or the perception in relations with shareholders, while that this is the case – can be a driver of engagement with other stakeholders is poor behaviour. undertaken by management. The key issue for shareholders is how culture The composition of organisational value impacts and underpins performance. has changed rapidly over the last 40 years. Companies with a ‘poor’ culture may In 1975, 83 per cent of the market value of perform well in the short term but this is companies in the S&P 500 was accounted unlikely to be sustainable over the longer for on their balance sheets. In 2015 that term. Investors report that the answers to 39 figure stood at just 16 per cent. CIMA’s simple questions can reveal much about 39 Ocean Tomo LLC, 2015. Intangible Global Intangible Finance Tracker 2015 culture, for example the extent to which Asset Market Value Study. S&P put the UK’s intangible asset value at senior managers care about their employees. 500 http://www.oceantomo. com/2015/03/04/2015-intangible- 40 64 per cent of total enterprise value. The way answers are given can also reveal asset-market-value-study/ attitudes to their wider stakeholders. 40 Brand Finance and CIMA, 2015. Global Intangible Financial Tracker “Culture often provides the most – An annual review of the world’s important insight into the intrinsic value intangible value http://www. of a company, but can be difficult to cimaglobal.com/Documents/ Thought_leadership_docs/ evaluate from company reporting alone. reporting/Brand-Finance-GIFT- Therefore shareholder engagement Report-2015.pdf should play a critical role.” 41 IBE, 2016. Stakeholder engagement – values, business Andy Griffiths, Executive Director, culture and society Investor Forum http://www.ibe.org.uk/

Culture report: Corporate Culture and the Role of Boards 31 Building trust with stakeholders

Some shareholders are not convinced that It is clear that shareholders need to talk they have the power or the ability to change to a wide range of people involved in a Companies need to come culture. Where they perceive a weak culture company in order to build an accurate up with their own metrics they are more aware of the risks to value picture of its culture. This includes on culture and report on and may be more likely to sell their shares. executives as well as NEDs and so it is those, on a year on year A number of passive fund managers important that investment houses ensure basis, so that investors can believe that engaging on culture is an that they are avoiding a siloed approach understand what boards important way of preserving value on behalf to dialogue. Companies often feel that are focusing on and how of clients. However, most asset managers corporate governance specialists and fund well they are achieving reported to us that their clients rarely put managers operate in isolation from one their objectives. them under pressure to put resources into another. Adopting a joint approach to engaging on corporate culture. It may, engagement could help deliver a more Helena Morrissey therefore, be helpful for asset owners to holistic view and improved ability on the Chief Executive encourage their fund managers to raise the part of investors to understand culture. Newton Investment subject of culture with the companies they Investment houses should also pay Management invest in on their behalf. attention to their own cultures, encourage challenge and practice what they expect Nevertheless, discussions with shareholders of investee companies. identified a growing appetite for an improved dialogue with companies on culture. This An increasing number of shareholders trend is likely to continue. It has implications believe that corporate culture should be for boards and for corporate reporting, and an important part of shareholder dialogue regulators will need to monitor this. There is with NEDs. Ultimately shareholders rely also a recognition by investors that collective on NEDs and should pay close attention action could deliver a consistent message to the way they are discharging their to companies and build trust. The Investor responsibilities, including around culture, Forum presents an opportunity for greater when exercising their right to elect them. collaboration.

Shareholders need to guard against concluding too much from a single set of indicators which may give some signals on risk but give little insight into the long-term sustainability of the business. Cultural indicators can act as a starting point for discussions with directors, but context is important and the quality of dialogue is key for assessing culture. Shareholders report that they seek reliable data and consistency which allows comparison with previous years and with other companies in the sector.

32 Financial Reporting Council Questions for investors Questions for boards

Do the board and senior management How do we include culture questions seem to have a clear idea of the in employee surveys? company’s purpose? Is there a forum for employees to Do the company’s values seem to be share ideas and concerns? aligned to its business model or models? How do we demonstrate we listen to the ideas and concerns from What first-hand experience do NEDs employees? have of conditions in the operating parts of the business? How comfortable do employees report they are with challenging and reporting How is the board assessing culture bad behaviour and is there any and how does it hold the executive evidence that they are doing this? to account? Do employees report that leaders and How does the board take account of senior managers live the values? culture when structuring remuneration? Is the chief executive willing to listen, How does the board ensure incentives take criticism and let others make do not encourage undesirable decisions? behaviour?

How does the company deal with employees who are in breach of company rules or codes of conduct?

What actions has the company taken in the last year to reinforce culture?

Are there examples of where the company has turned down business or not pursued a relationship with a potential business partner because of a lack of cultural fit?

What steps has the company taken to ensure that suppliers meet expected standards of behaviour?

Culture report: Corporate Culture and the Role of Boards 33 Building trust with stakeholders

Companies and investors agree that Reporting on culture a uniform set of cultural measures or The annual report shows indicators applied across all companies and There was strong consensus among how our distinctive culture sectors may not be fit for purpose. Instead, investors that there is a need for links to the business model indicators need to be relevant for investors companies to improve reporting on culture and strategy. It includes and meaningful in the context of the specific and communicate openly about the impact customers, colleagues, operating environment of the company of culture on the business. In the annual corporate partners and the concerned. Shareholders report that they reports of FTSE 100 companies while shareholders. It fits with the seek reliable and consistent data, which 48 per cent define the values of the company’s customer- allows comparison with previous years company, and 35 per cent the purpose, centric brand but is wider. and with others in a sector. Boards should only 14 per cent discuss their corporate It’s unique to the company consider carefully what information is culture.42 At an investor event at EY, and is our path to most useful. 81 per cent of investors said that commercial success. companies are not currently providing Efforts to encourage more consistent ways Glen Moreno in their public reports, the information of reporting in some areas are taking place. 43 Chairman investors need to assess culture. The Valuing your Talent initiative proposes Virgin Money measures and frameworks to report on A good explanation of the business model human capital including employee and key risks can also convey meaningful engagement, total workforce and insights into the culture. A commitment investment in training and development. to report is a good discipline and can These may be useful indicators of culture to translate into a commitment to take real investors and other stakeholders and allow action on culture – what gets reported comparisons to be made across company, tends to get done. By focussing on what sector and from year to year.44 action companies have taken investors can get a sense of whether they mean what they say. Companies could also disclose non-financial metrics and practical illustrations of how it expects business to be conducted and provide more context around data that they make public.

42 Black Sun, 2016. Corporate Culture: a thought piece on reporting http://bestpractice. blacksunplc.com/files/2016/ culture_report_v5.pdf 43 EY Investor Dialogue event November 2015 – audience poll of 21 institutional investors http:// www.ey.com/UK/en/Services/ Assurance/EY-assurance-services- cultural-assessments 44 Valuing your talent is an initiative between UK Commission for Employment and Skills (UKCES), CIPD, CIMA, the Chartered Management Institute and Investors in People – http:// www.valuingyourtalent.com/ for-external-stakeholders/ external-perspectives/towards- standardised-measures

34 Financial Reporting Council HOW CAN BOARDS ASSESS, MEASURE AND MONITOR CULTURE?

Views are divided about the extent to which Management information to the board culture can be measured. The majority of the is inevitably summarised and can be The most important thing in chairmen we interviewed feel that measuring presented to conceal the existence of real monitoring culture is to have culture is difficult and understanding it issues. Nevertheless, boards can do more effective ‘antennae’. Culture means drawing on information from a range by requesting access to relevant information; is, by definition, intangible of sources. A minority are more confident being smarter in their interrogation of that so you really need to listen about the ability to measure culture. information; asking pertinent questions; to the organisation and hear probing and challenging where appropriate; the nuances. There are also Chairmen recognise that there are and making sure action is taken when it is leading indicators like limitations on the board’s ability to know not satisfied that senior management is retention rates, staff surveys what is going on in the business. This can embedding the desired culture effectively. – and you can monitor constrain the board’s ability to challenge As well as requesting access to a range of externally using Glass Door, the executive. information sources, chairmen agreed that for instance. You bolt spending time in the business was critical them all together to form for getting a true sense of the prevailing a picture. culture in different parts of the business. Coram Williams Chief Finance Officer Pearson

Culture report: Corporate Culture and the Role of Boards 35 How can boards assess, measure and monitor culture?

When assessing culture, boards need to Understanding culture be aware of a number of contextual factors There are a number of that can influence culture, such as history There is strong agreement among different ways of measuring of the firm, impact of macroeconomic stakeholders that a determined effort is it – but experiencing it is conditions, political and regulatory climate, required to build a picture from various the most valuable and market sector, degree of competition, local indirect indicators and proxies of the true insightful. business environment and cultural norms. culture at different levels in the organisation. Derek Mapp Beyond these broader issues, they need to Companies report that they struggle fully Chairman assess information from a wide variety of to understand the complex chain of Informa company specific sources to gain a broad interactions that drive individual behaviour. range of insights into the overall culture and Traditionally, management has focussed on individual sub-cultures. the mechanisms, policies and processes that make up the operational framework of the company and which establish Receiving reports and boundaries, norms and minimum Spending time in the business information is all very well, but there is no substitute for standards of behaviour. Chairmen and chief executives agree going out into the business that there is no substitute for ‘walking the The realisation that management and and experiencing the shopfloor’ to ensure the board has a live boards need to understand and address culture for yourself. By understanding of the culture at different less tangible drivers of behaviour, such as and large, NEDs don’t do levels of the business and is able to closely held values and attitudes or social enough of this and boards intervene before cultural problems take hold. and power-driven pressures, that can lead should be more rigorous people to make poor choices is changing Site visits were cited as giving a good in insisting they do. the conversation in the boardroom. To do sense of what is going on, provided they Adam Crozier this justice boards need to shift focus and were not run as ‘state visits’, although they Chief Executive seek new ways of understanding what is are not always practical in organisations ITV really going on in their organisations. with multiple global locations and operations and such visits have their This suggests that the role of the NED is limitations. Chairmen and chief executives changing, with inevitable implications for emphasised that site visits are not only an the skillset, diversity and experience that opportunity to find out what is going on NEDs will add to the board in the future. but also demonstrate the importance and Certainly NEDs will need to become more presence of the board. It is the degree of culturally aware, more tuned in and more engagement and preparation of NEDs that knowledgeable about human behaviours makes the biggest difference; NEDs need and relationships. to be focussed and ready to ask the right NEDs will also need to be more proactive questions. An open discussion with the in their engagement with employees and chief executives to prepare the ground other aspects of the business and in their can guide NEDs to engage in a way that modelling of company values. This will have reinforces the values and culture and implications for which aspects of their role supports management’s message and NEDs prioritise and how they allocate their reinforce culture. Debriefs with the chief time. There will also be a corresponding executives on their return are also effect on the policies, practices and important and can provide useful insights processes around the recruitment, for management. induction and training of NEDs.

36 Financial Reporting Council Stakeholders agreed that informal time with executives and employees was Chairmen’s top tips It’s good for NEDs to go valuable in talking through things that out into the business but seemed to be out of alignment with Listen to the internal grapevine they need to do it carefully. company values and the desired culture. and pick up quiet messages Orchestrated royal visits NEDs need to be aware that power by herds of NEDs are in differentials make it hard for a member Host town halls – operations/frontline my view often not very of staff to challenge a senior executive. staff usually welcome the opportunity to engage productive, whereas Chairmen interviewed provided many individual NEDs popping practical examples of how they Become a customer/mystery shopper in to sniff the breeze improve their understanding of how works well. the business operates. Talk to frontline staff and the first line of supervision Rupert Soames An important role for boards and audit Chief Executive committees is to spot misalignment Talk to external stakeholders Serco between behaviour, purpose and values. Ask the simple questions – Where they spot gaps or misalignment, generally employees know if there they should be challenging robustly and is something wrong taking action to investigate further and where necessary to redirect management. Increase visibility, for example, Boards need to challenge themselves and expose new people to the board build a cultural lens into their discussions and decision-making, for example by Meet with future leaders without asking questions with a culture focus. their bosses Focus on culture during induction meetings

Assess the talent pool coming up through the organisation

Conduct deep dives into business units and engage with local management

Engage with a wide range of executive directors from different business functions, who can cascade the message back into their business units

Encourage NEDs to mentor middle managers

Listen for anecdotes and personal observations

Review customer complaints and follow up

Culture report: Corporate Culture and the Role of Boards 37 How can boards assess, measure and monitor culture?

Digital developments have led to a vast Cultural indicators increase in the volume of data and While the board cannot information that is available. Access to data Chairmen, investors and chief executives directly drive change, it can and information creates new opportunities were clear that a common set of cultural monitor and understand to better spot misalignment and respond measures or indicators for all companies how individuals at various to culture risk. The tools for analysing and would not be fit for purpose. What is levels behave. mining those information sources and important is that the indicators used are extracting the hidden messages have meaningful for the context and environment Philip Aiken become more sophisticated. in which the company operates and Chairman AVEVA relevant for the outcomes the company The growing ability to leverage technology wants to achieve. to assess and monitor culture risk means that boards are in a stronger position to Boards need to ask themselves what is understand how culture and behaviours most relevant for their company and seek impact performance.45 Objective, evidence- We carry out positive appropriate information accordingly. based tools are already available which climate index surveys every month which provokes Companies report using a range of are capable of layering and presenting conversation. Scores are information sources and tools to gain information from a range of sources and recorded and questions insights into culture and behaviours and across different sites to give a clear picture. asked as to why particular make the intangible tangible. Traditional Boards need to understand and utilise sites are lower scored. types of data and numerical indicators technology to assess and monitor the Sooner or later it affects such as employee turnover can give a existing culture and foster the desired the financial results. sense of scale and, as trends develop, culture. Boards should therefore be asking a clear indication of the direction of travel themselves whether they are using Nigel Stein and areas of potential concern. technology to its fullest and whether they Chief Executive have the right skills and knowledge on the GKN Other sources offer qualitative evidence board to do this. that when analysed and interpreted with sensitivity can give boards a more nuanced Culture indicators presented to senior understanding of the prevailing culture and management and the board should behaviours and offer a means of identifying include analysis of what the indicators cultural misalignment and the root causes mean, and draw insights from them into of problems. Targeted efforts to gather what they tell the company about its qualitative information from employees and culture, what the areas of concern are other stakeholder groups, for example via and what recommended actions should focus groups or interviews, can inform a be considered. This should capture more comprehensive cultural assessment information about sub-cultures and identify and highlight cultural risks which merit outliers. Leading indicators are particularly closer inspection. important, as they can help boards to spot misalignment before a serious problem arises.

45 Institute of Chartered Secretaries and Administrators, International Corporate Governance Network and IBE, 2016. Report of a senior practitioners’ workshop on identifying indicators of corporate culture

38 Financial Reporting Council When assessing culture, it is important to first establish localised cultural norms Areas for vigilance against which scores can be benchmarked. This is necessary in order to get a sense Silo thinking for whether an individual score is cause for concern. For example, a higher incidence Dominant chief executive of whistleblowing in the USA than in Japan Length of chief executive tenure may be more a reflection of cultural norms than an indication that there is an issue. Leadership arrogance

A report by the Institute of Chartered Pressure to meet the numbers/ Secretaries and Administrators, the overambitious targets International Corporate Governance Network and IBE published in February Lack of access to information 2016 identified three main drivers of bad behaviour: corporate stress, which led Low levels of engagement between people to take short cuts; excessive focus leadership and employees on short-term financial targets; and a Lack of openness to challenge tolerance of small breaches of the rules or a tendency to push at the limits of what Poor succession planning was permitted by the rules or regulations, which allowed misdemeanour to grow Misaligned incentives and flawed incrementally. It identified the following executive remuneration practices symptoms of a flawed culture: flawed Tolerance of minor regulatory or code executive remuneration practices, complex of ethics/conduct breaches by star legal structures, a tendency for takeovers employees to proliferate and lax financial discipline and excess leverage. Lack of diversity

Our engagement identified a number of Hierarchical attitudes areas for particular vigilance. Where boards spot any of these things, a closer look will usually be warranted. These red flags may well be suggestive of a wider issue with culture.

Culture report: Corporate Culture and the Role of Boards 39 How can boards assess, measure and monitor culture?

Many companies are therefore Providing assurance supplementing the results of the We look closely at staff around culture engagement survey with other sources turnover and customer of information, and attempting to overlay complaints. Boards can turn to HR, internal audit (IA), information and data points from those risk and compliance and other business sources to build a picture of the interaction Ian Durant functions such as finance to provide much between values, behaviours and Chairman of this data. A trusted and independent decision‑making. For example, integrating Greggs company secretary can be another HR measures of engagement with important source of information and conduit business performance measures such for those wishing to raise concerns. as sales and revenue to understand A small but significant number of chief whether engaged employees are driving business results. Culture goes wrong when executives singled out the finance function people are more interested as key to unearthing any behavioural lapses A board focus on what action is taken in what they would like the in the company. with the results of the employee truth to be, rather than in engagement survey to identify root causes what it is. They say a fish can give an indication of how committed rots from the head but in Human resources senior management is to promoting the my experience corporate desired culture. rot often starts in the HR has expertise and access to many finance department if they information sources which can provide a Companies that have tried in-depth surveys forget that their principal useful lens on culture and give an indication with a sample of employees involving role is to ensure that of whether behaviour is at the limit of, interviews with staff at different levels, management and owners or is broadly in line with values and particularly operations/frontline staff, find understand the truth. expected behaviours. This in turn sheds them helpful and illuminating and over time light on the sort of culture individuals may they provide useful trend data. Rupert Soames be encouraging or tolerating. In many Chief Executive Another development is the use of short, organisations HR is best placed to lead Serco cultural assessment, engagement and sharp employee pulse surveys at regular change, however some stakeholders felt intervals to gain insight into discrete issues; that HR needs to further develop its skills regular and ongoing engagement with and approach to contribute effectively to employees is a trend and ultimately may the assessment of culture. replace the annual survey.

By far the most commonly used tool A particular risk area for companies exists for gauging culture is the employee around the way people are incentivised. engagement survey. More than 80 per cent Boards should ensure they are paying of companies report conducting such a significant attention to the nature and survey to capture employee sentiment. The structure of incentives and the behaviour results of these surveys are frequently they drive. Remuneration and risk shown to the board. While they are a useful committees are in a position to support source, employee engagement surveys are boards in evaluating alignment between not, on their own, a reliable indicator of incentives, values and behaviours. HR culture, and can produce misleading is well placed to lead discussions on results depending on how the questions structuring incentives and work with the are posed, and whether employees feel board to develop these in line with they can answer honestly. However, when cultural values. used in conjunction with other employee voice mechanisms, engagement surveys can be a powerful way to engage the workforce, and gain insight on cultural issues.

40 Financial Reporting Council HR sources of insights Internal audit The intensity of incentive into culture Obtaining a realistic view of the culture schemes says something Responses to employee surveys, at the coalface is a common problem for about the company. especially those shedding light on boards across all sectors. The focus boards put middle and senior management on measures other than IA has the potential to be an important financial is important. attitudes provider of assurance to the board Succession plans alongside functions such as HR, Nigel Stein and risk and compliance. For companies Chief Executive Staff turnover and absenteeism rates with an IA function, its positioning and GKN reach are important factors. IA needs to Workforce diversity demonstrate independence and accountability and to have effective Staff training data mechanisms for communicating its The head of internal audit Recruitment policies and practices concerns about culture to board members. is a good source of This can begin with a clear mandate from intelligence and insights. Promotion decisions the audit committee. In financial services He has his ear close to firms the head of internal audit is required the ground. Exit interviews to report to the audit committee and this is becoming best practice for other sectors. Mike Evans Remuneration policies and practices, Chairman particularly the structure of financial Results can be reported informally or Hargreaves Lansdown and non-financial incentives formally within internal audit reports and areas of potential weakness identified can Grievance data be investigated. Audit committee members and senior executives, however, must be open to the idea that the sort of hard evidence to underpin conclusions found in more traditional areas of audit will not always be available. Most heads of IA told us that assigning experienced senior auditors who understand the organisation and have sound working relationships in place with managers is key to success.

Culture report: Corporate Culture and the Role of Boards 41 How can boards assess, measure and monitor culture?

Internal auditors will need to develop a broader set of skills than has been Compliance and control Internal audit functions are traditional, and place more emphasis indicators of culture valuable and are able to on asking questions about why certain provide advice on where we behaviours occur and understanding the Health and safety record, including are missing a trick. One way pressures that are driving the behaviours. near-miss reporting to gain value from internal However, IA can suffer from a perception Whistleblowing/speak up incidents audit is by having them it is a backwater and is not always valued work on projects and not as highly by management. Promptness of payments to suppliers just doing standard visits. The credibility of IA is fundamental and it Control failures and instances of poor Andrew Page needs to be appropriately resourced. Some compliance Chairman companies are taking steps to strengthen Northgate its role and reputation, for example by Fines/regulatory breaches requiring business units to be always audit ready and given no more than a month’s Expense claims notice before an audit. A stint in internal Breaches of the code of ethics/conduct audit as part of the graduate training programme can give participants a better grasp of the business and a keener appreciation of the value IA can add, which External sources of insights makes it more likely they will use it effectively. into culture

Customer complaints

Customer satisfaction data

Supplier feedback

Social media, for example, Glassdoor

Behavioural indicators of culture

Attitudes to regulators

Senior management attitudes to employees

How management responds to IA recommendations

Action taken to deal with poor behaviour/instances of non-adherence to values

42 Financial Reporting Council GSK (GlaxoSmithKline) carries out a Snapshots of existing values assurance programme across all Internal audit is now IA practice operations internationally. A multidisciplinary beginning to bring up team spends four to five weeks on site, different issues compared A survey of heads of IA conducted by interviewing employees at different levels to the past. There’s now the Chartered Institute of Internal Auditors in the organisation, which enables more focus on root causes. (IIA) in early 2016 as part of the FRC’s the company to see where leaders project, found that IA works most closely communicate the values and how people António Horta-Osório with HR and risk management functions are demonstrating them in the way Chief Executive when it comes to assessing culture.46 they work. Lloyds Banking Group However, group discussions and one on one interviews conducted by IIA between November 2015 and March 2016 found little evidence of this, suggesting that, while it may be recognised as a good idea, in practice it is not happening on a significant scale. The IIA’s survey revealed that staff surveys, IA’s role in auditing culture is to provide whistleblowing activity and governance independent advice and assurance to the structures are the most common proxies IA board that the culture and values it has set uses to audit culture. Other proxies include are appropriate given the organisational risk HR grievance data and exit interviews; context, and being lived throughout the management of customer complaints; organisation. 60 per cent of the IA heads values statements and their incorporation who responded to the IIA’s survey reported into recruitment and performance that their boards have established and management; and pay, reward and articulated the culture they want. Where incentive structures. Supplier feedback organisations have values statements, the can also be a useful gauge of culture challenge is how to gather evidence and as highlighted by the Groceries Code demonstrate that the values are being lived Adjudicator’s investigation into Tesco.47 at every level of the organisation. This is by no means straightforward. According to the The most popular methods used to audit IIA’s survey, only a minority (20 per cent culture by far were interviews and across non-financial services organisations, observation – nearly nine in 10 internal 42 per cent in financial services) of IA heads auditors use each of these methods. have been asked to assess the extent to Other methods include: focus groups; which the company’s values are evident in reputational analysis; and capturing reviews the behaviour of employees. To close this and lessons from near misses. Surveys gap audit committee chairs could ensure and interviews can provide indirect insights that values assessment is incorporated into and indicators of behaviour but the results the audit plan. may be skewed if employees do not feel able to speak openly and honestly.

46 The Institute of Internal Auditors, 2016. Organisational Culture: Evolving approaches to embedding and assurance. https://www.iia.org. uk/media/1591840/FINAL-0885- Culture-report-17-5-16-v4.pdf 47 Groceries Code Adjudicator, 2016. Investigation into Tesco plc. London: Groceries Code Adjudicator https://www.gov.uk/ government/uploads/system/ uploads/attachment_data/ file/494840/GCA_Tesco_plc_final_ report_26012016_-_version_for_ download.pdf

Culture report: Corporate Culture and the Role of Boards 43 How can boards assess, measure and monitor culture?

Root cause analysis, cited by 39 per cent Boards can reflect on whether they are of respondents, is an important way to get maximising the opportunity to utilise IA by underneath the skin of the behavioural/ asking some pertinent questions, such as: cultural issues. It is about looking not just at what has happened but also at why things happened. Root cause analysis can Questions for boards uncover organisational and process factors Is IA sufficiently highly valued within that may have been contributory factors, the organisation? for example, how targets and incentives are set and communicated, and how Does IA have the degree of appraisals are conducted. independence needed or do we need to change the reporting lines for IA? Leeds Building Society recently conducted a standalone audit of culture using a Does IA have a clear mandate to mixture of the methods outlined above. incorporate cultural issues into its audits and is this mandate written into the audit charter?

What steps do we need to take to invest in IA and develop the skills base and capabilities?

Could we do more to ensure IA, HR, compliance and risk, work collaboratively and report jointly to help us draw insights into culture?

44 Financial Reporting Council Participants at a roundtable of the External audit top nine external audit firms hosted by I am happy for internal and The Institute of Chartered Accountants in Culture is an important consideration for external auditors and staff England and Wales felt strongly that boards external audit, in particular its work around to raise issues based on a need to support progress in measuring the control environment and in identifying ‘gut feeling’. This is all part culture by articulating more clearly the specific risk issues. of the jigsaw puzzle. culture they want, translating that into External auditors are not embedded in behaviours and establishing benchmarks Nick Land the organisation to the extent of IA so the against which culture can be measured. Non-Executive Director opportunity to observe and assess culture and Chair, Codes and In the future, there is the potential for might be more limited. In addition, the Standards Committee internal audit and external audit to external auditors’ focus will be on the FRC and collaborate in this area as they do in behaviours which impact integrity of Audit Committee Chair relation to assurance around financial and the financial statements and hence some Vodafone non-financial controls, but the IIA’s survey aspects will fall outside the scope of a shows that only six per cent collaborate typical external audit. This makes it difficult on culture at present. for external auditors to give a formal view on culture as part of their audit opinion.

External assurance and observations are valuable nonetheless; it is independent and credible as it is not steeped in the organisation’s culture. This can support boards and audit committees’ assessment and monitoring of culture and an informal conversation with the chair, chief executive or audit committee can be a valuable source of insight.

Participants at a roundtable for FTSE 100 audit committee chairs hosted by KPMG agreed that external auditors are a useful source of insight into culture, but observed they can be reluctant to share views that are not backed up by hard evidence.

Many external auditors say they already give informal feedback on culture to audit committees, pointing out that a few leading indicators can stimulate a conversation. Some firms are making significant investments to develop their capabilities and services to measure and assess culture.

Culture report: Corporate Culture and the Role of Boards 45 CONCLUSION AND NEXT STEPS

This report aims to stimulate thinking around the role of boards in relation to culture, and encourage boards to reflect on what they are currently doing.

It sets out the key elements which boards should be considering in relation to The FRC’s next steps will be to: corporate culture. This is a wide field of commercial and academic study. –– reflect on feedback to this report; The reports of our coalition partners –– update our 2011 ‘Guidance on (Appendix 2) and other research referred Board Effectiveness’, taking into to in the footnotes of this report provide account the feedback we receive; more detailed information. –– continue to work with our partners to encourage debate on culture and to identify and share good practice.

Please email: [email protected] to get in touch.

46 Financial Reporting Council APPENDIX 1: CASE STUDIES

Culture report: Corporate Culture and the Role of Boards 47 Appendix 1: case studies

OLD MUTUAL GROUP VALUES AND CULTURE UNDERPINNING STRATEGY

Old Mutual Group is an international investment, savings, insurance and banking group made up of four financial services businesses – Old Mutual Emerging Markets, predominantly in South Africa and Africa, Nedbank in South Africa, Old Mutual Wealth in the UK and Old Mutual Asset Management in the US.

influenced individual performance scores Background which were linked to rewards.

Following the financial crisis in 2007/2008, Once the new behaviours had been Old Mutual decided to put the customer introduced, Old Mutual looked to how it back at the heart of the business, and knew was going to measure progress with the that values and culture would be crucial to required overall shift in culture and chose this. How the business set out its vision and to use the Barrett Values survey across strategy is made up of a customer promise the group. Barrett differs from employee – four values and six behaviours. engagement surveys, as it starts with an individual’s personal values, the values they Action perceive exist in the current organisation and the values they believe are needed to Sponsored by the board, the group’s HR take the business forward. By identifying function led a review of the values (integrity, misalignment, the data is used to generate respect, accountability, and pushing beyond conversations and then actions. boundaries) to see if they were aligned to the new customer-centric vision. Employees felt the values were still relevant, but they Impact were generic and help was needed to The first survey in 2011 identified a number understand what they meant in practice. of areas of dysfunction and only two matches (of ten possible) between existing and desired Through interviews with the top 100 leaders, culture as described by the company’s a survey of employees at all levels of the leadership group. Actions to address these group and workshops with the executive areas included work to focus on the customer, committee, Old Mutual identified six guiding changing the operating model to reduce behaviours that described the values in bureaucracy, changing its product offering practice in the context of the new customer- and future scenario planning to reduce centric vision and strategy: short-term focus. The result was that by 2015 –– Aim high and take your team with you the leadership group reported there were –– Customer first – they’re the reason seven matches between existing and desired we’re here culture and a ‘healthy’ culture score. How culture is measured is now central to how Old –– Treat the business like it’s our own Mutual assesses and manages cultural risk. –– Need to listen carefully and talk honestly –– Own our decisions, decide and deliver In March 2016, Old Mutual announced its plans to separate the group into four –– Win together and help others succeed stand-alone businesses. Consequently, Employees were regularly assessed the group culture and behaviours will against these behaviours. Performance change again to reflect the individual management included compulsory 360 businesses and the new role for the plc. degree feedback for all leaders solely This is an historical case study reflecting around the behaviours, and this feedback the position up until the change in strategy.

48 Financial Reporting Council LEAR CORPORATION LEADERSHIP DEVELOPMENT AND CULTURAL CHANGE

Lear Corporation is a Fortune 200 automotive supplier.

The final stage involved an assessment Background after six months’ participation in the training for managers. This included Recovering from a period of bankruptcy, sharing across management to ensure the Lear Corporation was forced by the development conversations included financial crisis to seek efficiency savings values-based assessment and that and radically alter its business model. leaders in the programme owned changes that enabled the new culture to develop. Action These changes necessitated an Impact assessment of culture. Working from The programme changed the business an individual and organisational values and Lear believe that this demonstrates perspective, HR focused on embedding the importance of structured leadership cultural change through four enabling development and engagement phases of culture change. programmes. The full effectiveness of The first stage of the change, labelled the cultural change programme will not awareness, involved communicating the be understood until after the first tranche culture change initiative through internal of activity; however, initial signs of improved publicity, such as posters. Leaders business performance are encouraging, were integral in communicating the and show that the initiative is having the change programme through clear right impact on the competitiveness of and coherent messaging. the business (Gill and DiDonato 2015).

Lear also focused on training and development for middle managers about new business behaviours and cultural assessment techniques in team environments. This included a number of away days exploring new behaviours, led by senior executives.

Lear updated performance management programmes to embed and assess values- based behaviours, and restructured or made redundant roles which did not fit the new cultural model. They also addressed bad-behaving high-performers.

Culture report: Corporate Culture and the Role of Boards 49 Appendix 1: case studies

L’ORÉAL EMPLOYEE ENGAGEMENT WITH ETHICS

Headquartered in Paris, L’Oréal is the world’s largest cosmetics and beauty products company, with 80,000 employees worldwide and sales of €25.3bn in 2015.

L’Oréal has a network of 67 ethics Background correspondents. Their job is to bring ethical leadership to all parts of the L’Oréal’s approach to ethics is about having business, including providing advice a large international staff adhere to a to employees about how to handle common set of ethical values, engaging concerns and explaining how the them, and helping them to make good group ethics approach can be adapted decisions. This goes beyond compliance to local customs. They also ensure that with rules and, to emphasise this, its ethics the company’s code of ethics is properly and compliance departments are separate, communicated, and that the relevant with the chief ethics officer reporting training is in place and they are empowered directly to the chief executive. to ensure that the programme is delivered. The company has four ethical principles: Each ethics correspondent serves a integrity, which enjoins people not to lie or term of three years. The country manager cheat; respect, which reminds them to treat submits at least two names to the chief others as they would wish to be treated; ethics officer who interviews the candidates courage, which encourages them to speak and has the last say on selection. L’Oréal up if they have concerns, recognising that estimates that the role takes up around for many people this is very difficult; and 10 to 15 per cent of their time. About transparency, which promotes an open 20 per cent come from each of the HR or environment in which there is less need finance functions and the remainder from for formal procedures and controls. other disciplines.

Action Impact Since 2009, the chief executive has made L’Oréal believes the ethics correspondents himself available one day every year to are a good way of spreading understanding answer questions on any ethical matter of of ethics throughout the organisation. They concern from staff worldwide through a provide leadership at a local level and help live web chat. This is followed by a similar staff feel able to speak up. session conducted by each of the country managers.

Last year more than 4,100 questions were submitted, of which 1,300 were directed specifically to the chief executive. The company estimates that the web chat was followed by around 56 per cent of its staff.

50 Financial Reporting Council TALKTALK CUSTOMER COMMUNICATION IN A CRISIS

TalkTalk is a TV, broadband, mobile and phone provider. Based in London, it has a focus on innovation and value for money.

Background Impact In October 2015, TalkTalk suffered a The crisis exposed a need for cultural cyber-attack accompanied by a ransom change and TalkTalk will focus on team demand. The perpetrators stole data that spirit and reducing silos in future. could have compromised the security of the customers. The board has become much more aware of risk and is now asking questions in a different way to ensure that it understands Action the nature of the company’s risks and how well they are mitigated. The first decision the company took was to admit what had happened. There was no legal requirement to make a public statement, but the deciding factor was the desire to warn customers of the heightened risk. Beside emphasising how seriously the company was taking the situation and the efforts it was making to repair the damage, there was a strong focus on customer safety, including arrangements for them to arrange free credit reference monitoring. Internal communications and staff morale were also important and at the height of the crisis the chief executive was communicating with staff twice a day.

Less than a week after the attack, the company was able to confirm that the stolen data was insufficient on its own for the perpetrators to take money from customers’ bank accounts and the police had arrested a suspect in connection with the case.

Even though their trust had been shaken, the majority of customers, when polled, thought the company had done a good job in keeping customers informed.

Culture report: Corporate Culture and the Role of Boards 51 Appendix 1: case studies

BAE SYSTEMS BUILDING TRUST WITH ORGANISED LABOUR

BAE Systems is a leading international defence, security and aerospace company headquartered in London with operations in the US, Australia and Saudi Arabia.

Background Impact The company recognises a number of The company’s approach is to be as open trade unions and has high levels of union as possible with its union interlocutors and membership. The unions have full time this is valued by employees. The regular conveners (trade union officials paid for by involvement of BAE Systems’ senior BAE Systems) in each business and site. leadership has fostered a high level of Separately the company has a bargaining personal trust. Confidentiality is essential, and consultation framework at group level. and so far the record has been good, as both sides recognise the mutual advantage The current relationship has evolved of the arrangements. over many years and is, at least in part, a response to BAE Systems’ acquisition of defence and shipbuilding businesses where there was a tradition of poor and often confrontational industrial relations.

Action BAE Systems and the unions describe their relationship as one of trust. This is based on a culture of openness, a structure which allows potentially serious issues to be escalated and addressed before they become critical, and a recognition that, in many areas of public policy, the unions and management have common interests.

The central element is the Corporate Consultative Committee that allows BAE Systems to engage with its own union officials at convener level. This has about 30 members and meets quarterly. It discusses issues of mutual interest to the unions and the group. This allows the company to engage with unions at every level throughout the group, while giving individual sites and businesses the freedom to conduct their own bargaining on wages and other specific local issues.

52 Financial Reporting Council MARKS AND SPENCER SUPPLY CHAIN STANDARDS

Head-quartered in London, Marks and Spencer is a leading retailer of clothing, home products and food.

Deforestation is an example of an issue Background where it works with other global retailers and food producers to promote sustainably Marks and Spencer’s business model produced palm oil, low carbon refrigeration aims to create long-term value through and eliminate food waste. This is helping the effective use of its resources and the company to meet its target of zero relationships. It manages these in line deforestation from the use of palm oil, soy, with its core values of inspiration, cattle and paper materials in the company’s innovation, integrity and in touch. products by 2020.

A critical part of the process is audit and Action assurance where it must both satisfy itself Marks and Spencer launched Plan A in that the required standards are being met January 2007 setting out 100 commitments and avoid alienating its suppliers. The to achieve in five years covering responsible company has opted for defining a period sourcing, reducing waste and helping in which an audit will take place. communities. It has since introduced Plan A 2020 which consists of 100 new, revised and existing commitments. Impact Plan A delivered measurable savings of Plan A on supply chain standards means £160m in 2014/15 and a total of £625m working with industrial bodies, opinion since 2007. The figure relates to savings formers and suppliers to deliver innovation generated through reduction of waste and and working practices that will reduce environmental efficiency. Some of these hazardous waste discharges from clothing savings accrue to the supply chain where, manufacture to zero by 2020. for example, it has required its top clothing In food production, this means an incentive suppliers to install energy efficient lighting, for suppliers through a gold, silver and and improved insulation and temperature bronze benchmarking standard for human controls. resources, environmental and resource However, the company does not seek to efficiency management. Orders flow to measure the financial impact of Plan A in suppliers that meet the highest standards. terms of margin, corporate earnings and The company bought 32 per cent of its brand value. The trust Plan A generates product from suppliers meeting at least the with customers, as well as the impact on silver standard in 2015, up from 19 per cent the morale of its workforce and that of its the previous year. It is now looking to buy suppliers, will make the company more 100 per cent of products from factories that resilient and adaptable. have met at least the silver level by 2020.

Culture report: Corporate Culture and the Role of Boards 53 Appendix 1: case studies

GSK (GLAXOSMITHKLINE) PROVIDING ASSURANCE ON COMPANY VALUES

GSK is a science-led global healthcare company that researches and develops a broad range of products.

The nature of the Values Assurance reviews Background requires a multidisciplinary team including auditors, psychologists, operational staff GSK’s Values Assurance programme is and those with lean six sigma experience. designed to evaluate how well GSK’s four Values Assurance addresses a critical gap values are embedded in the culture of the in traditional audit programmes, providing company, and to support the business to an independent perspective on leadership, further embed the values. attitudes and behaviours that underlie the internal control framework. Action The methodology is similar to a 360 degree Impact feedback process; it includes a leadership The programme is not only an important self-assessment supplemented by an component of GSK’s internal assurance independent evaluation. The process plan, but delivers fresh insights that are captures both quantitative and qualitative making a difference to risk management, data to form a holistic view of the values strategy, and GSK’s reputation. maturity, behaviours and culture.

A number of actions were taken to address the areas of opportunity identified in the Values Assurance process. They include: creating values-based case studies for training; integrating values into recruitment and selection processes; implementing recognition programmes to reinforce values-based behaviour; storytelling to role model the values; and conducting resiliency programmes to sustain energy and good health during change. At an organisational level, the insights gleaned from the programme are being used to drive culture change across emerging markets. Priorities include promoting speak up behaviour worldwide.

54 Financial Reporting Council LEEDS BUILDING SOCIETY INTERNAL CULTURE AUDIT

Leeds Building Society was established in 1875 to help people save money and to buy their own home and this is still its core purpose.

In order to benchmark the results of the Background audit and describe the existing culture, the internal audit team developed a Culture As a result of the Financial Conduct Maturity Path. Colleagues were requested Authority’s Risk Outlook 2014, which to score their assessment of culture and identified culture as a key issue for board members were asked for their views the sector, Leeds Building Society for comparison. undertook a culture audit.

Action Impact The results from the review were assessed The audit was based on six themes in to identify key themes for improvement. a Culture Cluster, setting the scope and Internal audit reported these results to the approach for each theme was conducted board in 2015 and the chief executive has as an audit in its own right while leveraging initiated a programme to implement other audit plan deliverables wherever changes. The results and planned actions possible. The themes were: tone at the top, were shared via the Society’s intranet. risk culture, governance, member value, aspirational values, and colleague To continue their review of culture the audit advocacy. team are developing cultural indicators to consider as part of audits in 2016 and to be Expected and actual controls for each reported to the audit committee and board. theme were categorised into three types: enablers – the processes and frameworks in place to support the desired culture; drivers – the incentives to encourage the right behaviours, such as recruiting the right people, reward and performance management; and belief – focussed on what colleagues actually felt and believed in. Experienced senior auditors were trained to ensure consistency and get to the core of colleagues’ beliefs. The responses were scored by colleagues on a scale of 1–6.

Culture report: Corporate Culture and the Role of Boards 55 APPENDIX 2: METHODOLOGY

56 Financial Reporting Council The FRC held a roundtable with FTSE 100 chairmen and initial discussions with some of our stakeholders in early 2015 to identity the important themes on the subject of company culture.

We formed a Steering Group which Together, with our partners, we held included our partners, the Chartered hundreds of meetings and discussions Institute of Management Accountants with individuals working in, directing, and (CIMA), the City Values Forum, the advising companies, as well as academics, Chartered Institute of Personnel and professional bodies and not for profit Development (CIPD), the Institute of organisations with expertise and Business Ethics (IBE) and the experience in company culture, to gather Chartered Institute of Internal Auditors evidence and inform our report. We also (IIA) to help us pursue the themes in undertook an extensive literature review. four workstreams. We would like to thank Independent 1. Delivering sustainable success Audit Limited for their work to survey – the role of an effective board. 44 FTSE chairmen and 33 FTSE company secretaries, and to interview 22 FTSE 2. People issues – delivering alignment chief executives and 58 FTSE chairmen. between culture, values, human This work provided rich insight into the views resource practices and performance and practices of companies and made reward systems. an invaluable contribution to the project.

3. Stakeholder issues – relationships We would particularly like to thank our with shareholders, customers and partners for their contribution and guidance suppliers, and the impact on the throughout the project. wider community and environment.

4. Embedding and assurance – measuring and monitoring culture, the role of internal audit, risk management and public reporting of cultural indicators.

Culture report: Corporate Culture and the Role of Boards 57 Appendix 2: methodology

Steering Group members The reports of our project partners produced Peter Cheese, Chief Executive, CIPD as part of this project or Philippa Foster Back, Director, IBE referred to in this report

Deborah Gilshan, Head of Sustainable Chartered Institute of Personnel and Ownership, Railpen Development, 2016. A duty to care? Evidence of the importance of Nick Land, Non-Executive Director organisational culture to effective and Chair of the Codes and Standards governance and leadership Committee, FRC and Non-Executive https://www.cipd.co.uk/hr-resources/ Director, Vodafone research/duty-care-evidence- Tony Manwaring, Executive Director, organisational-culture.aspx External Affairs, CIMA The Institute of Internal Auditors, 2016. Alisdair McIntosh, Director of Policy, IIA Organisational culture: Evolving approaches to embedding and assurance Richard Sermon, Chairman, the City https://www.iia.org.uk/policy/ Values Forum publications/culture-evolving- approaches-to-embedding-and- Charles Tilley, Chief Executive, CIMA assurance-board-briefing/

The Institute of Business Ethics, 2016. Stakeholder engagement – values, business culture and society http://www.ibe.org.uk/list-of- publications/67/47

City Values Forum with Tomorrow’s Company, 2016. Governing Values: risk and opportunity – a guide to board leadership in purpose values and culture http://www.cityvaluesforum.org.uk/ leading_with_integrity_publications.html

Chartered Institute of Management Accountants, 2016. Financial Management – Rethinking the business model http://www.cimaglobal.com/Thought- leadership/Research-topics/Budgeting- and-planning/Rethinking-the-business- model/

58 Financial Reporting Council APPENDIX 3: ACKNOWLEDGEMENTS

Culture report: Corporate Culture and the Role of Boards 59 Appendix 3: acknowledgements

The FRC is very grateful to all those who responded to our invitation to participate, and contributed.

A C

Aberdeen Asset Management Cable & Wireless Communications ACCA (Association of Certified CAH Chartered Accountants) Card Factory Admiral Cardiff Business School Anderson Risk CBI Anglo American Centrica Antofagasta Chartered Accountants Ireland aSource Global Chartered Bankers Institute Associated British Foods Chartered Management Institute Association for Insurers Chiron Risk and Risk Managers (Airmic) Close Brothers Association of Financial Mutuals CLS Holdings Aster Group Cobham AVEVA CORE Aviva CRSA Forum AXA UK Cutting through the Grey B D

Babcock International DAC Beachcroft BAE Systems DCC Balfour Beatty Deloitte Bank of England Department for Business, Banking Standards Board Innovation and Skills Barclays Diageo BBA Aviation Diploma BDO DMGT Beever Struthers Domino’s Pizza Group Bellway Drax Berkeley Research Group DuplexR Black Sun Blackrock E Blueprint for Better Business EasyJet BNY Mellon EDF Energy Board Insight Electrocomponents Board Intelligence EMIS Bodycote Emperor Design BP Engage for Success BP and E Global Essentra British American Tobacco Esure Group British Private Equity Ethics in Business and Venture Capital Association Experian British Standards Institute Expo Link BT Group EY Building Societies Association Bunzl BUPA Bwin Party Marketing (UK)

60 Financial Reporting Council F J

F&C Commercial Property Trust J Sainsbury Financial Conduct Authority Jardine Lloyd Thompson Group FirstGroup John Lewis Partnership Foreign & Colonial Investments Johnson Matthey Freshfields JP Morgan Future Value Jupiter Asset Management G K

GC100 KBM Strategy GCP Infrastructure Investments KPMG GKN Glencore Xstrata L GO Investment Partners Land Securities Grant Thornton Leading in Risk Greggs Leeds Building Society GSK (GlaxoSmithKline) Legal & General Investment Management H Lloyds Banking Group London School of Economics Hansteen London South Bank University Hargreaves Lansdown Londonmetric Property Hasley Keetch L’ O r é a l Hedley May Heidrick & Struggles M Henley Business School Herbert Smith Man Group Hermes Manifest HomeServe plc Marks & Spencer Howden Joinery Marston’s HSBC Mazars McKinsey & Co I Merlin Entertainments ICAP Morrisons IG Group N Imperial Brands Informa National Grid Institute of Chartered Accountants Navex Global in England and Wales Newton Investment Management Institute of Chartered Accountants Next Generation NED Network of Scotland NMC Health Institute of Chartered Secretaries Northgate and Administrators Nostrum Oil and Gas Institute of Directors Institute of Risk Management O IHG Intermediate Capital Old Mutual Group Intertek Group Organisation for Economic Co-operation Intu Properties and Development Investor Forum ITV

Culture report: Corporate Culture and the Role of Boards 61 Appendix 3: acknowledgements

P T

Pearson TalkTalk Pentland Tate & Lyle Persimmon Tesco Petrofac The Institute of Consumer Service Pensions and Lifetime Savings Association Thomson Reuters Polymetal International Tomorrow’s Company Poundland TR Property Investment Trust PricewaterhouseCoopers Trades Union Congress Prudential Travis Perkins Prudential Regulation Authority TSB Banking Group Public Concern at Work Tullow Oil PZ Cussons U Q UBM Quoted Companies Alliance UBS Asset Management UK Financial Investment R UK Shareholders Association Unilever Railpen Unipart Rathbone Brothers USS RELX Group Rentokil Initial V Reed Elsevier Rio Tinto Value Alpha Risk Oversight Solutions Vectura Group Royal Bank of Scotland Vesuvius Royal Dutch Shell Virgin Money Royal London Asset Management Vodafone Royal Mail RPC Group W S Wolseley Woodford Funds Santander Workspace Group Schillings International WPP Schroders Serco Y Severn Trent Water Yorkshire Building Society Group Shire Simmons & Simmons Sky Slaughter and May Smith & Nephew Spencer Stuart Sports Direct St. James’s Place St. Modwen Properties Stagecoach Group Standard Chartered Standard Life Standard Life Investments

62 Financial Reporting Council APPENDIX 3: ACKNOWLEDGEMENTS

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